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Court of Appeal, Second District, Division 2, California.


No. B087534.

Decided: December 19, 1995

Blecher & Collins, Maxwell M. Blecher and James Robert Noblin, Los Angeles, for plaintiff and appellant. David B. Bloom, James E. Adler, Los Angeles, Golenbock, Eiseman, Assor & Bell, and Martin S. Hyman, New York City, for defendant and respondent.

Plaintiff ABC International Traders, Inc. (ABC) appeals from an order dismissing its action against defendant Matsushita Electric Corporation of America (MECA) after the trial court sustained MECA's demurrer to ABC's second amended complaint without leave to amend.   ABC contends it properly stated a cause of action for MECA's violation of Business and Professions Code section 17045 1 and California's unfair competition statute.   (§ 17200 et seq.) 2  It asks this court, “[i]f [it] agrees with ABC's legal arguments, but finds the pleading factually insufficient, [to overturn] the grant of demurrer ․ to allow ABC to cure such deficiencies by amendment.”

Because this case comes to us after the sustaining of a demurrer, all well-pleaded allegations of ABC's second amended complaint, which is at issue in this appeal, will be taken as true.  (Fermino v. Fedco, Inc. (1994) 7 Cal.4th 701, 706, 30 Cal.Rptr.2d 18, 872 P.2d 559.)


ABC is a wholesale distributor of telephone and other electronic products for resale to retailers throughout the world.   It filed its second amended complaint on June 23, 1994.   Named as defendants were Procom Supply Corporation (Procom) and Tele–Com Office Products Corporation (Tele–Com), two competitors of ABC who are not parties to this appeal, and MECA, which does business as Panasonic Company.

ABC's first cause of action was for violations of the Unfair Practices Act, and in particular sections 17045–17048.   It alleged that in or about 1989, ABC had a “strong suspicion” MECA was providing Procom and Tele–Com a 5 percent discount on their purchases of Panasonic telephone and other electronic products.   ABC was not receiving such a discount.   Around October 1991, MECA refused to sell any more of its products to ABC.   In September 1992, one of Procom's owners and its sales manager approached ABC with a proposal whereby Procom would sell Panasonic telephone products to ABC at a price 2 percent below that paid by other wholesale distributors.   During the course of the discussion, Procom disclosed that MECA “had for years been giving Procom and Tele–Com a five percent discount from the prices charged to other wholesale distributors.”   Procom did not specify whether the discount had applied only to telephone products, but ABC stated on information and belief that it had extended to other electronic equipment as well.

ABC asserted the existence of the 5 percent discount was “secret,” since neither MECA nor any of the wholesale distributors receiving the discount disseminated information about it “to substantial segments of the wholesale or retail market” for Panasonic products, nor did any of them confirm to ABC, prior to September 1992, that Procom and Tele–Com were receiving the discount.   ABC further charged the services Procom and Tele–Com furnished MECA were functionally equivalent to those provided by ABC and other non-defendant wholesaler distributors;  that Procom and Tele–Com had not earned the discounts in any manner permitted under the Unfair Practices Act;  and that they were not “innocent, unknowing recipients” of the discounts because they either were aware or should have been aware the discounts were unavailable to ABC and other non-defendant wholesale distributors of MECA's products.

ABC maintained that it had paid MECA $7,973,096 for telephone products between February 1988 and December 1991 and $11,730,880 for other electronic products from about 1987 through 1991.   Of those total sums, approximately $1,433,243 had been expended for telephone products and $2,108,740 for other electronic products for the period between February 15, 1991 and December 31, 1991.3  According to ABC, had it received the 5 percent discount, it would have paid at least $71,662 less for the telephone products and $105,437 less for the other electronic products it purchased since February 15, 1991.   The absence of the discounts put ABC at a competitive disadvantage resulting in lost sales and profits, and tended to destroy competition among wholesale distributors of Panasonic products.

In its second cause of action, ABC claimed that “[b]y engaging in the practice regarding discounts alleged above,” defendants had violated the state's unfair competition statute.   Pursuant to section 17203, ABC requested an order requiring defendants to restore all the money it had lost and to disgorge the profits defendants had received as a result of their misconduct during the four-year period preceding the commencement of this lawsuit.4  ABC limited its allegations to events occurring after February 15, 1990, because of the four-year statute of limitations applicable to actions under the unfair competition statute.  (§ 17208.)

MECA demurred, urging ABC's second amended complaint did not state facts sufficient to constitute a cause of action.   Among the purported deficiencies cited by MECA were ABC's failure to adequately allege facts establishing secret discounts granted by MECA, injury to a competitor of MECA, and any tendency to destroy competition between MECA and its competitors.   MECA additionally argued ABC had sought restitution for MECA's alleged violation of the unfair competition statute even though injunctive relief, to which restitution could only be ancillary under the statute, was neither requested nor supportable.   MECA accused ABC of deleting without explanation damaging admissions which had appeared in ABC's original complaint.   Procom and Tele–Com filed joinders in MECA's demurrer.

ABC's opposition took issue with the soundness of MECA's legal argument.   However, as a protective measure in the event the trial court disagreed with its position, ABC asked that it be given an opportunity to amend its complaint.   It did not suggest what amendments it might make, except to indicate it could more precisely allege Procom and Tele–Com “knowingly received a either [sic ] secret rebate or unearned discount.”

The trial court sustained MECA's demurrer to the entire second amended complaint without leave to amend.   Procom and Tele–Com's demurrers were sustained without leave to amend only as to the second cause of action.   ABC was given 20 days to amend its first cause of action as it related to Procom and Tele–Com.5


I. Violation of Section 17045

“[A] violation of section 17045 consists of three elements:  (1) a secret payment or rebate, (2) the injury of a competitor and (3) the tendency of such rebate to destroy competition.”  (E & H Wholesale, Inc. v. Glaser Bros. (1984) 158 Cal.App.3d 728, 738, 204 Cal.Rptr. 838.)   ABC contends each of these elements was established in its second amended complaint since it pled that MECA had provided a discount, which was secret, unearned and unavailable to ABC;  the discount caused monetary injury to ABC;  and the discount caused injury to competition among wholesale distributors of MECA's products, i.e., ABC, Procom, and Tele–Com.

 Here, as below, the legal question dispositive of ABC's ability to state a cause of action under section 17045 is, whose competitors, and what level of competition, must suffer injury for a violation of the section to occur?   Nearly three decades ago, our Supreme Court strongly stated that the Unfair Practices Act was directed at “primary competition,” that is competition at the level of the business engaging in the discriminatory practice.

In Harris v. Capitol Records etc. Corp. (1966) 64 Cal.2d 454, 50 Cal.Rptr. 539, 413 P.2d 139 (Harris ), the court considered a complaint alleging locality discrimination, in violation of section 17040.   The plaintiff in Harris, the owner of a retail record store, sued three record distributors, alleging they had created an unlawful locality discrimination by selling at one price to him and at another price to a subdistributor who had opened a retail record store of his own across from plaintiff's establishment.   The court agreed with the defendants that “section 17040 is intended to apply only to competition on the same ‘level’ as the person allegedly creating the locality discrimination (i.e., ‘primary’ competition), rather than to competition between those who purchase from the alleged discriminator (i.e., ‘secondary’ competition).”  (Harris, supra, 64 Cal.2d at p. 460, 50 Cal.Rptr. 539, 413 P.2d 139.)

The high court then proceeded to make the following, consistent observations about the Unfair Practices Act as a whole, specifically referring to section 17045:

 “Throughout the Act the Legislature has manifested its intent to discourage practices which injure the seller's competitors (§§ 17040, 17043 [sales below cost], 17045, 17071 [presumption of injurious intent] ) and thereby tend to create the monopolies condemned by section 17001 [ ].[6 ]  [Italics added.]   Equally apparent is the Legislature's concern to allow the seller to meet in good faith the prices of his competitors (§§ 17040, 17050 [inapplicability of prohibitions against locality discrimination, sales below cost, and loss leaders] ), thereby fostering the competition promoted by section 17001.   Together these constitute the ‘horizontal’ concept of price regulation, one of the fundamental characteristics of this legislation.   In his exhaustive study entitled Experience in California With Fair Trade Legislation Restricting Price Cutting (1936) 24 Cal.L.Rev. 640, 686, Professor Ewald T. Grether explained:  ‘Whereas the Fair Trade Law has to do with vertical price relations, the Unfair Practices Act operates horizontally.’  (Italics in original.)   And in Cupp, The Unfair Practices Act (1936) [ ] 10 So.Cal.L.Rev. 18, the author said that ‘The act may be said to be the consummation of years of effort by businessmen to carry out the horizontal concept of trade regulation.’   More recently, it has been pointed out that under Millage [v. Interstate Bakeries Corp. (1957) San Bernardino Superior Court Nos. 84573 and 85262] the Unfair Practices Act ‘protects only first-line competition against predatory price cutting on an area basis and does not make illegal price discriminations which only injure second or third-line competition at the buyer level or lower․  [A] seller can lawfully discriminate in favor of one of his purchasers for the purpose of enabling that purchaser to meet his competition, so long as there is no intent on the part of the seller to prevent or destroy the competition of other sellers at his level.’  (Bermingham, Legal Aspects of Petroleum Marketing Under Federal and California Law (1960) 7 U.C.L.A.L.Rev. 161, 246–247.)”  (Harris, supra, 64 Cal.2d at pp. 461–462, 50 Cal.Rptr. 539, 413 P.2d 139.) 7

In response to the “complain[t] that [its] construction of the Act [would] allow a predatory company ‘to vertically feed on those beneath it,’ ” the court in Harris replied, “Such arguments should be addressed to the Legislature, which alone is equipped to determine the gravity of the economic evil here alleged, and to take such steps as it deems appropriate.”   (Harris, supra, 64 Cal.2d at p. 462, 50 Cal.Rptr. 539, 413 P.2d 139, fn. omitted.)

 Harris thus makes it clear that section 17045 is aimed at, and requires pleading and proof of, secret rebates or discounts whose effect is injurious not to competitors of those receiving such allowances, but to competitors of those bestowing them.   Moreover, the court's passing remark about the section's inapplicability to the situation there presented in no way detracted from or undercut its earlier discussion about the intent of the Unfair Practices Act and its express inclusion of section 17045 in the course of that commentary.   Rather, in responding to the plaintiff's claim that defendant record distributors had participated in his competitor's retail sales of records at less than cost by granting the competitor an advertising allowance, the court merely pointed out that “advertising allowances are special benefits that would fall, if at all, under the terms of section 17045.”  (Harris, supra, 64 Cal.2d at p. 463, 50 Cal.Rptr. 539, 413 P.2d 139.)   It instantly ruled out the possibility that the allowance at issue was of the variety proscribed by section 17045, noting it “was not secret” and “ ‘extended to all purchasers purchasing upon like terms and conditions.’ ”  (Ibid.)  It was entirely understandable, given the nature of the plaintiff's contention, that the court would concentrate on the attributes of allowances prohibited under section 17045, rather than on the level of competition being regulated.

ABC propounds a recent Court of Appeal decision under section 17045 that construed the statute significantly more broadly.   In Diesel Electric Sales & Service, Inc. v. Marco Marine San Diego, Inc. (1993) 16 Cal.App.4th 202, 20 Cal.Rptr.2d 62 (Diesel Electric), a former seller of hydraulic hose and fittings sued a manufacturer, and a competing distributor that had received discounts from that manufacturer, for violation of section 17045.   The court reversed a nonsuit for the recipient competitor.   The court reasoned that all the elements of section 17045 had been satisfied because, in addition to a secret discount, there was evidence that the plaintiff buyer had been injured as a competitor, and that competition at the plaintiff's level had been damaged by its departure from the market.  (Id. at pp. 212–214, 20 Cal.Rptr.2d 62.)   The court also rejected the defendant buyer's argument that only discounting sellers, not favored buyers, could be liable under the statute.   Parroting the conclusions reached in another case that had held buyers too could be liable, G.H.I.I., supra, 147 Cal.App.3d at pp. 271–272, 195 Cal.Rptr. 211, the court stated section 17045 was not expressly limited to sellers, and its broad construction would foster competition.  (Diesel Electric, supra, 16 Cal.App.4th at pp. 214–215, 20 Cal.Rptr.2d 62.)   The court in G.H.I.I. in turn had found support for its expansive reading of the statute in the federal Robinson–Patman Act.  (15 U.S.C. §§ 13–13b, 21a.)   It reasoned, “Since the California Unfair Practices Act closely parallels the Robinson–Patman Act, and is based upon the same policy considerations [citation], we think it well serves the general policy of our law to recognize an action against buyers ․ under section 17045.”   (G.H.I.I., supra, 147 Cal.App.3d at p. 271, 195 Cal.Rptr. 211.)  G.H.I.I. seemingly overlooked the fact that, unlike this state's Unfair Practices Act, “[o]ne of the central purposes of the [1936] Robinson–Patman amendments [to the Clayton Act] was to remedy competitive injury at the secondary level that arises from price discrimination.”  (Paceco, Inc. v. Ishikawajima–Harima Heavy, etc. (N.D.Cal.1979) 468 F.Supp. 256, 263, italics added;  see also F.T.C. v. Anheuser–Busch, Inc. (1960) 363 U.S. 536, 543–544, 80 S.Ct. 1267, 1271, 4 L.Ed.2d 1385.)

Under the circumstances, we cannot accept Diesel Electric's determination that section 17045's elements of injury to competition and to a competitor may be satisfied by proof of such injury to a competitor of the discount recipient, rather than to competitors of the discounting seller.   The Diesel Electric opinion took this proposition for granted.   The court cited no authority for it, with the exception of G.H.I.I., and did not even consider the contrary language of the Supreme Court in Harris.   Indeed, the overgenerousness of the court's construction of section 17045 was further betrayed by its statement that the text of the statute is not limited to sellers.   To the contrary, section 17045 explicitly directs its prohibition against the giving, not the receipt, of secret benefits.   Whether or not competition would be better fostered by imposing section 17045 liability upon both sellers and buyers, as the court in Diesel Electric assumed, is a matter for the Legislature to resolve.  (Accord, Harris, supra, 64 Cal.2d at p. 462, 50 Cal.Rptr. 539, 413 P.2d 139.)

 Although review was denied in Diesel Electric, neither that decision nor the others relied upon by ABC carry the intrinsic persuasiveness or the imprimatur of a tribunal exercising superior jurisdiction so as to convince us to depart from the Supreme Court's plain teachings in Harris.   We hold, in line with those teachings, that section 17045 requires injury to competition at the level of the business granting the discount or rebate, and that injury to a competitor of the recipient of such benefits, as ABC has alleged, is insufficient to trigger the statute.

 Inasmuch as ABC has never alleged MECA's discount practices injured any competitor of MECA's or tended to destroy competition at MECA's level of commerce, or that ABC's complaint could truthfully be amended to so assert, there is no reasonable possibility ABC can state a cause of action for violation of section 17045.   That being so, there is no merit to its suggestion that it should be permitted to proceed against MECA on the theory that MECA colluded in the violation of that section.  (§ 17048.)   The trial court correctly dismissed ABC's first cause of action.8

II. Violation of Section 17200 **


The order dismissing ABC's action against MECA is affirmed.


1.   Business and Professions Code section 17045, which is part of California's Unfair Practices Act (Bus. & Prof.Code, § 17000 et seq.), provides:  “The secret payment or allowance of rebates, refunds, commissions, or unearned discounts, whether in the form of money or otherwise, or secretly extending to certain purchasers special services or privileges not extended to all purchasers purchasing upon like terms and conditions, to the injury of a competitor and where such payment or allowance tends to destroy competition, is unlawful.”Unless otherwise indicated, all further statutory references are to the Business and Professions Code.

2.   Section 17200 defines unfair competition to “mean and include any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 (commencing with Section 17500) of Part 3 of Division 7 of the Business and Professions Code.”

3.   This time-frame is significant because the statute of limitations for causes of action seeking actual damages under the Unfair Practices Act is three years.  (G.H.I.I. v. MTS, Inc. (1983) 147 Cal.App.3d 256, 276–279, 195 Cal.Rptr. 211 [G.H.I.I.].)   ABC filed its original complaint on February 14, 1994.

4.   Section 17203 specifies:  “Any person who engages, has engaged, or proposes to engage in unfair competition may be enjoined in any court of competent jurisdiction.   The court may make such orders or judgments, including the appointment of a receiver, as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition, as defined in this chapter, or as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.”

5.   ABC's third amended complaint against Procom and Tele–Com must be filed within 20 days of the filing of this court's remittitur.

6.   Section 17001 states:  “The Legislature declares that the purpose of [the Unfair Practices Act] is to safeguard the public against the creation or perpetuation of monopolies and to foster and encourage competition, by prohibiting unfair, dishonest, deceptive, destructive, fraudulent and discriminatory practices by which fair and honest competition is destroyed or prevented.”   Section 17002 declares the Act is to “be liberally construed that its beneficial purposes may be subserved.”

7.   The Millage case, which was heavily relied upon by the Harris court, did not deal exclusively with locality discrimination.   It also held that the provisions of the Unfair Practices Act “prohibiting secret rebates and discounts ․ apply only if a competitor of the seller granting such rebates or discounts is injured.”  (Bermingham, Legal Aspects of Petroleum Marketing Under Federal and California Law (1960) 7 U.C.L.A.L.Rev. 161, 247.)

8.   Our interpretation of Harris as establishing that the Unfair Practices Act is intended to protect only first-line competition would appear to adversely impact ABC's ability to proceed against the remaining defendants, Procom and Tele–Com, whose receipt of discounts has allegedly injured second-line competition.   If so, Procom and Tele–Com can presumably revisit the question after our remittitur issues.   The failure to state a cause of action is a nonwaivable defect which can even be raised for the first time on appeal.  (Unruh v. Truck Insurance Exchange (1972) 7 Cal.3d 616, 622, 102 Cal.Rptr. 815, 498 P.2d 1063;  Code Civ.Proc., § 430.80, subd. (a).)

FOOTNOTE.   See footnote *, ante.

FUKUTO, Associate Justice.

BOREN, P.J., and BRANDLIN, J.***, concur.

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