New Study Signals Potentially Significant Changes to California’s Antitrust Laws

In response to the state legislature’s 2022 directive for the California Law Revision Commission (CLRC or Commission) to study potential reforms to the state’s antitrust law (i.e., the Cartwright Act), the CLRC launched Study B-750 and created eight working groups to identify perceived gaps in the Cartwright Act.

Those working groups were:

• Single Firm Conduct. Examined the current lack of any analog in the Cartwright Act to Section 2 of the Sherman Act regarding single-firm conduct (i.e., monopolization).
• Mergers and Acquisitions. Studied whether California should establish an M&A notification and review framework akin to the Hart-Scott-Rodino Act.
• Concerted Action. Analyzed certain restraints of trade (e.g., resale price maintenance), the legal standards applicable to them (per se versus rule of reason), and existing statutory language that limits certain claims (e.g., tying) to commodities rather than all goods and services.
• Consumer Welfare Standard. Reviewed the perceived shortcomings of the “consumer welfare standard” and the potential implications of expanding the “harms” covered by the law.
• Technology Platforms. Examined the purportedly unique challenges posed by large technology platforms and their business models under the Cartwright Act.
• Enforcement and Exemptions. Identified areas requiring legislative guidance to clarify differences between the Cartwright Act and federal antitrust law.
• Concentration and Competition in California. Analyzed the degree and effect of concentration in the labor, agriculture, healthcare/pharmaceuticals, and entertainment sectors.
• Artificial Intelligence (added in mid-2024). Investigated ways to mitigate the purported risks posed by pricing algorithms, artificial intelligence, and other technologies, and assessed the pros/cons of a European-style digital regulator.

Over the last year, the working groups submitted reports and the CLRC heard testimony from representatives of the working group and any public comments to those reports at four public hearings. Some reports simply summarized the current law while others offered sweeping recommendations. The Commission held its final hearing on October 10, 2024, and CLRC staff are targeting early 2025 to provide their recommended revisions to California’s antitrust laws to the Commission.

Over the course of the last year, Morgan Lewis attorneys monitored the working group reports, public commentary, and each of the public hearings. We have concluded that there may be significant changes coming to the Cartwright Act, which are likely to have a meaningful impact on businesses operating in California, particularly with respect to Single Firm Conduct and Mergers and Acquisitions.

Potential Antitrust Reforms Related to Single Firm Conduct and Mergers and Acquisitions

The Single Firm Conduct working group identified what it deemed a “fundamental shortcoming” of the Cartwright Act not to apply to single firm conduct.[1] The working group suggested that “California courts should develop their own jurisprudence defining anticompetitive exclusionary conduct” to avoid the “known shortcomings” of federal law on single firm conduct, thus requesting that California legislation go beyond Section 2 of the Sherman Act. The working group’s proposed language includes broad changes to current law:

A firm is deemed to have engaged in anticompetitive exclusionary conduct if that conduct tends to (a) diminish, or create a meaningful risk of diminishing, the competitive constraints imposed by that firm’s rivals and thereby increasing, or creating a meaningful risk of increasing, that firm’s market power, and (b) does not provide sufficient benefits to prevent the firm’s trading partners (often its customers, but sometimes its suppliers, including workers) from being harmed by the increased market power.[2]

The working group also suggested eliminating the requirements for private plaintiffs to define a “relevant market” or to show that a defendant’s conduct allowed the defendant to gain or achieve a market share above any currently accepted thresholds of market power. Not surprisingly, there have been many criticisms of the above proposals given their stark departure from existing law at both the state and federal level.

The Mergers and Acquisitions working group recognized the efforts by the Uniform Law Commission to create state-level pre-merger notifications and enable state enforcers to receive materials submitted to federal authorities through the existing merger review process governed by the federal Hart-Scott-Rodino Act.[3] While the working group agreed that existing law may have been too lax on certain mergers and acquisitions, it cautioned that too strict of a standard at the state level could impose additional costs on businesses (that would face duplicative administrative processes) and state agencies (that take on administrative costs to review and potentially challenge mergers that no other agencies find problematic).[4] Finally, the working group commented that while industry-targeted legislation may be appealing, such proposals “eschew[] the principle that antitrust enforcement applies in similar ways across all sectors of the economy.”[5]

Next Steps

During the October 10, 2024 public hearing, CLRC staff indicated that its goal is to provide the Commission with recommendations in early 2025. After it receives staff memoranda, the Commission will begin its deliberations and will craft its final recommendations to the Legislature. The Commission will distribute tentative recommendations to the public for comment, after which it will publish its final recommendation, including draft language for proposed changes to legislation, to the legislature.

Conclusion

Study B-750 has been a massive undertaking by CLRC staff to consider potential changes to the Cartwright Act. Based on the process so far, it is likely that CLRC staff will recommend at least some changes to existing law and that the Commission will recommend at least some of those changes to the legislature. Depending on what the legislature considers and adopts, there may be dramatic changes to California antitrust law, and there appears to be only one remaining public comment period after the tentative draft before proposed recommendations are sent to the legislature. Morgan Lewis is continuing to monitor developments on these issues and is available to discuss if you or your company need counseling on these potential issues or opportunities to participate during the final comment period.