Hon. Dorsey B. Hardeman

Chairmen Opinion No. M-**57** Committee on State Affairs Texas Senate Austin, Texas Re: Constitutionality of Senate Bill 255, as amended.


### DearSenator Rardeman: You have requested our opinion mended, would be constitutional if its present form. a8 to whether S. B, 255, ar enacted by the Legislcrture in

In essence this bill prohibits wholesale or retail, below the cost the salt of mtrchandlet, at thereof whensuch sale is **made** with the purpose or intent to in;lure competition. The stated pur**DO&S** of the bill ie "to saftmard the DUbllC aaainet the creation br p,erpetuation 

### of monopolies and to foster ana encourage compttition by prohibiting unfair; dishonest, deceptive, destructive and fraudulent practices by which 

### fair andhonest competition Is destroyed andprevented. ” Such a purpose is a legitimate object for the exercise of the police power of the state of Texas. See Section **26,** Article I of the Texas Constitution. See also, Attorney Ceneralls Opinion **WW-1043**(1961 which is concerned with legislation closely analogous to the b111 nowpresented. Thirty-one states have enacted laws prohibiting sales below co&, andno such law has been held unconstitutional Insofar as the power of the legislature to prohibit such sales is concerned. However, the constitutionality of any act of this nature can only be evaluated by examining its provisions in detail -

” +mven where the power has been conceded specif~c’provlsions have been Invalidated. There Is thus substantial indication that the real problem Is oneof draftsmanship, of choosing amongdiverse statutory pitfalls andyet accompllsh/Zng7 effective regulation.” 52Harv.L.Rev. 1142 (1939) Et page 1144. **See**more recent casts collected In LaneDistributors v. TiltOn, **81**A.2d **786,** pages 795-796 **(New**Jersey S.Ct. 1951), accord.

**- 273** **-**Hon. Dorsey B. Hardeman, Page 2 (M-57 )

Theprecise f&ctors, onwhich the constitutionality of a statute 

### of this nature turns, are for the most part suggested in an analysis contained in 52Harv.L.Rev. 1142 (1939). These factors are listed in a numerical order below with a discuss1on,following each. The points are to a large extent overlapping but provide a convenient frame of reference for discussion:
the ci,e %? - Theact struck downby the Texas SupremeCourt in

anAntonio Retail Grocers v. LafferQ, 297 S.W.2d 813 (Tex,S.Ct. lg>v) was limit d I proposed bill, on the othei haid:!ffect to grocery stores alone. The spplies to all retailers andwholesalers. The act is therefore not unconstitutE81 for promoting discrimination against anyparticular trade group and the Lafferty case is easily distinguished.

2c. F%== - Since many.sales below cost cannot be considered as unfair ra e practices but are the result of errors in inventory control, variation in supply and demand, competitive forces or a combination of the above factors, and further, since a strict prohibition against all sales below cost would require amerchant to absorb losses which the public interest in preventing monopolization or promoting competition would not reasonably require; - statutes of this nature must exempt such transactions as: close-outs in good faith of part or all of the owner’s stock; bona fide sales of seasonal, perishable, or deteriorated goods to prevent total loss to the vendor; and sales madeunder court order to protect creditors and sales made to meet legal competition. These requirements 8re met in Sections **8**and 9 of the Proposed Senate Bill 255, as amended.
**3.** Defi~nition of Cost - Under the proposed bill, cost Is presumedto be lower of Invoice or market, less any discounts frown invoice, plus freight, 8 deemedcost of cartage-and any taxes which are directly attributable to an item (not corporate frsnchise, incame and ad valorem taxes - i.e, the definition does not include

“overhead taxes” which would not normally be allocated to the sale of anyparticular product). It would be difficult for 8merchmt accused of violation to seriously argue that he was prejudiced by application as a tion of his actual expenses) of the dtf1nit1on provide (Jior Rg;y under the proposed bill. Theproblem of allocating overhead costs - i.e. of assigning general expenses to particular products and periods - has traditionally proved a source of dlfflculty in drafting a constitutional definition

- 274- !Hon. Dorsey B. Hardeman, Page 

### 3 (M-57 )

of “cost” since’ Snyresolutlon of the problem, a8 a must be somewhatarbitrary.

. See discussion 57Y+le .~- practical matter, 

### lawJournal391 st page 

### 394;52Harvard LawReview 1142 at page 1147. Such constitutional problems as are inherent In allocating general 

### ovtrhtad expenses have been avoided under Senate Bill 255, as amended, by giving the benefit of all doubts to oneaccused of violation - his costs are assumed to include nogeneral overhead. 

### 4. Intent - Theabsence of intent as 8prerequisite to a finding of violatY6iii?% held to Invalidate an earlier proposed act of this nature. Attorney General’s opinion WW-125(1957). As proof of intent is required to sustain any litigation authorized by the act now proposed, we find no reason to review WW-123,but simply note it is inapplicable here. 

### 5. Remedies - 

### SenateBill 255, 8s amended,**dot8** not 

### provide for criminal penalties s Thepresence or absence of such penalties has frequently been cited as being an important consideration 

### Indeterminingthe conrtltutionallty of 8bill of this nature. See 52Harv.L.Rev. 

### 1142 (1939) at page 1145:
n cost to meiP ere the exemption **Lfor** salts below

competition7 is not expressly limited to legal competition, the i&y is opened to frustration of the statute if 811 membersof the trade mayas a dbfense assert that they were meeting 

### eachother’s llleg81 prices- Onthe other hand, there is hardship in making the seller ascertain at his peril whether competing prices are legal. It might be sensible here to distinguish between defenses in criminal and injunctive proceedings making bona fid

- b 11 f df t ormer but not to the latter. erre(;pzsi: :%:d.y See also McCormick on Evidence (West 19%) pq 

### 661; Validity of Statutory Prtsumptlons~

I! *Thedistribution in civil casts of the burden of pleading, as between plaintiff and defendant, carrying with It usually the burden of the burden of persuasion9... plaintiff under the P roceeding with evidence and need not be placed upon the constitu ion7 mince there is no reason for special protection o? o?E party to the civil



### -275-. .

Hon. Dorsey B. Hardeman, Page 4 

### (M-57 )

case rather than the other cases.
. o as there Is in criminal

11 .In the,realm of criminal proceedings, however, the rule’is quite different. Thetraditional commonlaw procedure emphasized that the burden of evidence and the burden of persuasion are upon the government to establish the guilt of the accused.” Accord, Twin City CandyandTobacco Co. Inc. v. B. A. Weisman %iOWB: CCH,lg6? Trade Regulation Reports, p9 

### tJ)3$ 7OU,in Part as

“Except as to criminal prosecutions where a defendant enjoys a presumption of Innocence and the burden is onthe state, wesuggest that the difficulty of proof

. ‘.maybe overcome constitutionally by the adoption of a statute which makes 8 sale below cost prima facie evidence of predatory intent or effect. While there is 8 divlsion of opinion with respect to the validity of such aprovision, the weight of authority, andwebelieve the better reasoned decisions, hold there is no constitution81 impediment to requiring that in a civil case the vendor must prove his below cost sales 

### weremadewithout predatory intent or effect.” (March 20, 1967.) As above etsted, the proposed bill 8s amended doesnot contain criminal sanctions - thus further doubts as to its constitutionality may

### beremoved. Civil penalty sections such as have been provided for tnforcement in the proposed bill (along with Injunctive relief and damages) are brought to trial under the civil rules of evidence; both the accused andthe state are in the samepositions &alitigants in civil actions; and, therefore, the presumptions of innocence need not be in full force and effect. Barrington v. State, 407 S.W.2d 467 (Tex.S.Ct. 

### 1.966); Cert. den. U.S. -(F b e
. 19b71. Pursuant to the above discussion **we**answer your 

### qW?atiOnas follows : S. B. 259, as amended, meets all tests of constitutionality, which are normally applied to “Unfair Sales $egislatlonn cmnd,if enacted, will 

### beconstitutional.



### -276-Hon. Dorscy B. Hardernan,Page 5 ,,(N- 57 )



### SUMMARY

S. B, 255, as' amended, would be constitutional if enacted into law by the Legislature.. 

## v&d’trulyyours,

PreparedbyLarry**S. Craddock**  Assistant Attorney General,


### APPROVED: OPINIONCOMMITTEE Hawthorne Phillips, Chairman W.V. Geppert, Co-Chairman ThomasMack Robert 

### Owen KernsTaylor 

### JackSparks 

### STAFFLEDALASSISTAIiT **A,** J. 

### Carubbi,Jr.

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.,