Hon. Dorsey B. Hardeman            Opinion No. M- 57
Chairmen
Committee on State Affairs         Re:    Constitutionality of Senate
Texas Senate                              Bill 255, as amended.
Austin, Texas
Dear Senator Rardeman:
     You have requested our opinion      a8 to whether S. B, 255, ar
mended, would be constitutional   if     enacted by the Legislcrture in
its present  form.
      In essence this bill prohibits      the salt of mtrchandlet,     at
wholesale or retail,    below the cost thereof     when such 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 comptti-
tion by prohibiting    unfair;  dishonest,   deceptive,  destructive    and
fraudulent practices    by which fair and honest competition       Is
destroyed and prevented. ” 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 legisla-
tion closely   analogous to the b 1 11 now presented.
      Thirty-one  states have enacted laws prohibiting   sales below
co&, and no such law has been held unconstitutional      Insofar as the
power of the legislature    to prohibit  such sales is concerned.   How-
ever, 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
     one of draftsmanship,     of choosing among diverse statutory
     pitfalls    and yet accompllsh/Zng7   effective   regulation.”
     52 Harv.L.Rev. 1142 (1939) Et page 1144.         See more
     recent casts collected      In Lane Distributors   v. TiltOn,
     81 A.2d 786, pages 795-796 (New Jersey S.Ct. 1951),
     accord.
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Hon. Dorsey B. Hardeman, Page 2          (M-57 )


      The precise  f&ctors,  on which the constitutionality   of a statute
of this  nature turns, are for the most part suggested in an analysis
contained in 52 Harv.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 act struck down by the Texas Supreme Court in
the ci,e %? an Antonio Retail Grocers v. LafferQ,          297 S.W.2d 813
(Tex,S.Ct.    lg>v) was limit d I      ffect to grocery stores alone. The
proposed bill,     on the othei haid:! spplies to all retailers   and whole-
salers.    The act is therefore    not unconstitutE81     for promoting
discrimination     against any particular    trade group and the Lafferty
case is easily distinguished.
                             Since many.sales below cost cannot be considered
as unfair
       2c. F%==
              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     pro-
hibition    against all sales below cost would require a merchant 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 made under 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 pre-
sumed to be lower of Invoice or market, less any discounts frown
invoice,   plus freight,     8 deemed cost 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 any particular     product).
      It would be difficult for 8 merchmt   accused of violation    to
seriously  argue that he was prejudiced by application     as a
tion of his actual expenses) of the dtf1nit1on    provide (J ior Rg;y
under the proposed bill.
      The problem 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

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Hon. Dorsey B. Hardeman, Page 3         (M- 57 )


of “cost” since’ Sny resolutlon   of the problem, a8 a practical    matter,
must be somewhat
          .        arbitrary.   See discussion  57 Y+le.~-law Journal391
st page 394; 52 Harvard Law Review 1142 at page 1147.        Such consti-
tutional 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 one accused of violation     - his
costs are assumed to include no general overhead.
      4. Intent - The absence of intent as 8 prerequisite         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 in-
tent 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 - Senate Bill      255, 8s amended, dot8 not provide
for   criminal penalties s
      The presence or absence of such penalties  has frequently been
cited as being an important consideration   In determiningthe conrtl-
tutionallty   of 8 bill of this nature.
       See 52 Harv.L.Rev.     1142 (1939)   at page 1145:
            n          ere the exemption Lfor salts below
      cost to mei P competition7    is not expressly limited to
      legal competition,   the i&y is opened to frustration
      of the statute if 811 members of the trade may as a
      dbfense assert that they were meeting each other’s         ll-
      leg81 prices-    On the 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 injunc-
      tive proceedings    making bona fid     b 11 f   df          t
      -      ormer but not to the latter. err e(;pzsi:      :%:d.y
       See also   McCormick on Evidence     (West 19%)   pq 661;
Validity   of Statutory     Prtsumptlons~
            I!     *The distribution  in civil    casts of the burden
      of pleading,    as between plaintiff     and defendant,   carrying
      with It usually the burden of        roceeding with evidence and
      the burden of persuasion9...      need not be placed upon the
      plaintiff  under the constitu P ion7 mince        there is no
      reason for special protection      o? o?E party to the civil

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Hon. Dorsey B. Hardeman, Page 4      (M- 57 )


     case rather   than the other   as there   Is in criminal
     cases.  . o
           11    .In the,realm of criminal proceedings,    however,
     the rule’is    quite different.  The traditional   common law
     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 Candy and Tobacco        Co. Inc. v. B. A. Weisman
    CCH, lg6? Trade Regulation Reports,        p9 tJ)3$7OU, in Part as
%iOWB:
            “Except as to criminal prosecutions     where a defen-
     dant enjoys a presumption of Innocence and the burden
     is on the state, we suggest that the difficulty        of proof
        . ‘.may be overcome constitutionally     by the adoption of
     a statute    which makes 8 sale below cost prima facie evi-
     dence of predatory intent or effect.        While there is 8
     divlsion   of opinion with respect to the validity      of such
     a provision,    the weight of authority,    and we believe 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 were made without predatory
     intent or effect.”      (March 20, 1967.)
      As above etsted,   the proposed bill 8s amendeddoes not contain
criminal sanctions    - thus further doubts as to its constitutionality
may be removed.
      Civil penalty sections    such as have been provided for tnforce-
ment in the proposed bill    (along with Injunctive    relief   and damages)
are brought to trial under the civil     rules of evidence;     both the
accused and the state are in the same positions      &a litigants    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  eb . 19b7 1.
      Pursuant to the above discussion    we answer your qW?atiOn as
follows :
      S. B. 259, as amended, meets all    tests   of constitutionality,
which are normally applied to “Unfair     Sales   $egislatlonn    cmnd, if
enacted, will be constitutional.



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     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’truly   yours,




     Prepared by Larry S. Craddock
     Assistant      Attorney   General,
     APPROVED:
     OPINION COMMITTEE
     Hawthorne Phillips, Chairman
     W. V. Geppert, Co-Chairman
     Thomas Mack
     Robert Owen
     Kerns Taylor
     Jack Sparks
     STAFF LEDALASSISTAIiT
     A, J. Carubbi, Jr.




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