Plotkin v. Tanner's Vacuums

Opinion

This is an appeal from an order (judgment) ■ of dismissal entered after a demurrer to a second amended complaint was sustained without leave to amend.

Statement Of Facts

In 1966 James R. Plotkin, individually, and Pasadena Vacuum and Sewing Center, a California corporation, plaintiffs and appellants (appellants) began to buy parts to service Royal vacuums directly from the Royal Appliance Manufacturing Company (Royal), defendant and respondent.

In March 1971 appellants began to purchase Royal vacuum cleaners directly from the factory of Royal and enjoyed full credit privileges. Also in that year, appellants began using Royal’s logo in telephone book advertisements. In June 1972 appellants were apparently given status as a factory warranty and service station, and were listed as such in a service brochure of Royal.^[1]

Tanner’s Sew-Vac and Northeast Distributors are fictitious firm names used by respondent Martin T. Tanner (Tanner). Tanner serves the same geographical area as appellants and in June of 1973, Royal named Tanner the exclusive distributor for this area. Appellants were informed that all orders for products or parts were to be placed with Tanner, and the prices for all of the products or parts could be raised within the sole discretion of Tanner at any time. In April 1974, appellants received a new listing of Royal’s authorized service stations and their name and address had been deleted.

Issue Presented

Does appellants’ second amended complaint state facts sufficient to state a cause of action for unfair competition?

Argument

Appellants claim they have stated a cause of action for “unfair competition” as defined in the California Unfair Practices Act (UPA) set

forth in California Business and Professions Code section 17000 et seq.^[2] and California Civil Code section 3369.^[3] In general they argue that the provisions of the sections are so broad that they include almost any form of unfair competition, and what constitutes an unfair or fraudulent business practice under any given set of circumstances is a question of fact to be determined at trial and not by a ruling on a demurrer. They rely primarily on two cases, Paramount Gen. Hosp. Co. v. National Medical Enterprises, Inc., 42 Cal.App.3d 496 [ 117 Cal.Rptr. 42 ], and People ex rel. Mosk v. National Research Co. of Cal., 201 Cal.App.2d 765 [ 20 Cal.Rptr. 516 ]. While these cases do emphasize that the statutes codifying the Unfair Practices Act are to be liberally construed, recognizing that "unfair or fraudulent business practices may run the gamut of human ingenuity and chicanery," (People ex rel. Mosk v. National Research Co. of Cal., supra, at p. 772) the general principles set forth therein do not aid appellants. The only issue here is whether it is unfair competition for a manufacturer to create a distributorship and require retail purchasers to purchase from distributors rather than directly from the manufacturer.^[4] The cited cases do not determine this issue. -

It is the various consequences flowing from appellants’ removal as distributors and the designation of Tanner as the exclusive distributor in the area that appellants object to. Their primary objections are that they have been forced to buy all parts and products from their main competitor Tanner at a higher price. Also that they must pay cash while Tanner enjoys credit privileges with Royal and that they cannot use the “Royal” trademark or operate as an “authorized service station” although Tanner is allowed to do so.

These alleged consequences do not amount to unfair competition under the sections cited by appellants. The UPA generally breaks down

into two main parts: prohibitions against "below cost selling" (Bus. & Prof. Code, § 17043) and against "locality discriminations" (Bus. & Prof. Code, §§ 17031, l7040).^[5] The acts prohibited by these sections are designed to encourage competition and to safeguard the public against monopolies. (Bus. & Prof. Code, § 17001, supra.) As applied to our present case, the purpose of the act is to prevent Royal from obtaining an unfair advantage over competing manufacturers of the same product. Harris v. Capitol Records etc. Corp., 64 Cal.2d 454 [ 50 Cal.Rptr. 539 , 413 P.2d 139 ], elucidates.^[6] On pages 461-462 it states: "Throughout the Act the Legislature has manifested its intent to discourage practices which injure the seller's competitors `(§§ 17040, 17043, 17045, 17071) and thereby tend to create the monopolies condemned by section 17001 Equally apparent is the Legislature's concern to allow the seller to meet in good faith the prices of his competitors (§§ 17040, 17050), 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 [<sup>[7]</sup> ] has to do with vertical price relations, the Unfair Practices Act operates horizontally.' (Italics in original.) And in Cupp, The Unfair Practices Act (1936) suprq, 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 Mu/age 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.)” (Italics added.) Harris further stated at page 463: “[A] pricing structure in which a distributor sells to a retailer at one discount and to a rack-jobber at another is expressly permitted by section 17042.”^[8]

In U.S. v. Arnold, Schwinn & Co., 388 U.S. 365 [ 18 L.Ed.2d 1249 , 87 S.Ct. 1856 ], the distributorship concept was recognized in an anti-trust case where the court on page 376 [18 L.Ed.2d page 1258] said: “. . . if nothing more is involved than vertical ‘confinement’ of the own sales of the merchandise to selected dealers, and if competitive products are readily available to others, the restriction, on these facts alone, would not violate the Sherman Act.”

On analysis appellants’ complaint is only based upon the fact that Royal has classified Tanner as its sole distributor in appellants’ area. Royal’s action was simply vertical “confinement” of sales of its own merchandise and is not precluded by the UPA.

Appellants’ alternate argument that they have stated a cause of action under Civil Code section 3369 also lacks merit. As pertinent here the section provides in subdivision 3: “. .. unfair competition shall mean and include unlawful, unfair or fraudulent business practice . . . .” Historically, the law of unfair competition was primarily concerned with the use of unfair means to draw customers away from competition. (7 Witkin, Summary of Cal. Law (8th ed. 1974) Equity, pp. 5302-5303.) Then the language of section 3369 “extended to the entire consuming public the protection once afforded only to business competitors.” (Barquis v. Merchants Collection Assn., 7 Cal.3d 94 , 109 [ 101 Cal.Rptr. 745 , 496 P.2d 817 ].) Numerous California decisions say that the essential test of unfair competition is whether or not the challenged activity, is likely to deceive the public. (See e.g.: Payne v. United California Bank, 23 Cal.App.3d 850 , 856 [ 100 Cal.Rptr. 672 ]; People ex rel. Mosk v. National Research Co. of Cal., supra, 201 Cal.App.2d 765 , 771-773; Audio Fidelity, Inc. v. High Fidelity Recordings, Inc., 283 F.2d 551 , 557.)