California Civil Jury Instructions (CACI)

3332. Affirmative Defense to Locality Discrimination, Below Cost Sales, Loss Leader Sales, and Secret Rebates - Functional Classifications

[Name of defendant] claims that any [locality discrimination/below cost sales/loss leader sales/secret rebates] proven by [name of plaintiff] [is/are] within the law because they apply to different classes of customers. To succeed, [name of defendant] must prove all of the following:

1. That [name of defendant] created different classes of customers, such as [broker/jobber/wholesaler/retailer/[insert other]];

2. That customers in the different classes performed different functions and assumed the risk, investment, and costs involved;

3. That the difference in [price/rebate/discount/special services/privileges] for [product/service] was given only in those sales where the favored buyer performed the function on which the claim of a different class is based; and

4. That the difference in price was reasonably related to the value of such function.

Directions for Use

This defense applies to locality discrimination, sales below cost, loss leader sales, and secret rebates.

Sources and Authority

Business and Professions Code section 17042 provides: Nothing in this chapter prohibits any of the following:

(a) A selection of customers.

(b) A functional classification by any person of any customer as broker, jobber, wholesaler or retailer.

(c) A differential in price for any article or product as between any customers in different functional classifications.

" '[T]he law should tolerate no subterfuge. For instance, where a wholesaler-retailer buys only part of his goods as a wholesaler, he must not claim a functional discount on all. Only to the extent that a buyer actually performs certain functions, assuming all the risk, investment, and costs involved, should he legally qualify for a functional discount. Hence a distributor should be eligible for a discount corresponding to any part of the function he actually performs on that part of the goods for which he performs it.' " (Diesel Electric Sales & Service, Inc. v. Marco Marine San Diego, Inc. (1993) 16 Cal.App.4th 202, 217 [20 Cal.Rptr.2d 62], internal citations omitted.)

"[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." (Harris v. Capitol Records Distributing Corp. (1966) 64 Cal.2d 454, 463 [50 Cal.Rptr. 539, 413 P.2d 139], footnote omitted.)

Secondary Sources

1 Witkin, Summary of California Law (9th ed. 1987) Contracts, §§ 591- 596, pp. 534-539

1 Antitrust and Trade Regulation Law Section, State Bar of California, California Antitrust Law (2d ed. 1997), § 1.02B.5

3 Levy et al., California Torts, Ch. 40, Fraud and Deceit and Other Business Torts, § 40.153 (Matthew Bender)

49 California Forms of Pleading and Practice, Ch. 565, Unfair Competition (Matthew Bender)

23 California Points and Authorities, Ch. 235, Unfair Competition (Matthew Bender)

(New September 2003)