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 Honorable W.~S. Heatly, Jr.
 Chairman, State Affairs Committee
 House of Representatives
 Austin, Texas
                                     Opinion No. ~11-123
                                     Re: Conetitutlonalltyof
                                         House Bill 25 and Senate
                                         Bill 177, known as the
                                         "Sales Limitation Act."

 Dear Mr. Heatly:
           With respect to your request for an opinion on the
 constitutionalityof the proposed Sales Limitation Act" ln-
 corporated in House Bill 25 and Senate Bill 177, we submit the
 followlngt
            In es:senaethese identicalBills provide a definition
 of the 'cost basis" of products sold In the course of wholesale
 and retail business and prohibit the sale, or the advertising
 or offering for sale, of any Item of merchandise at less than
 cost ,whenthe seller limits, or reserves the right to limit, any
 ourchaser to a quantity less than the entire supply of that item.
 A similar Act was held-unconstitutionalin San Antonio Retail
 Grocers v. Lafferty, 2%' S.W.2d 813 (Tex. Sup. Ct. 1957) on the
 grounds that by limiting Its effect to grocery stores alone, it
 provided an unreasonableand arbitrary classification. The
 constitutionalimpediment found by the oourt in the
 case has been removed In these Bills slnoe they are v
                                                     app 1etil.e
 to all sales in the course of businees. It is necessary, there-
 fore, to consider in this opinion questions not reached in the
 Lafferty case.
            The purpose of the'Bllls as evidenced by the emergency
 clause Is to "protect retailers and wholesalers, and the consuming
 public, against monopolisticpractices designed to lessen or destroy
 competitionin the ordinary purchase and sale of commodities."
 Such a purpose is a legitimate object for the exercise of the
 police power, and statutes prohibiting sales below cost when such
 sales are intended to Injure competitionor when they have that
 effect, have generally been held to be valid legislativemethods
 for the accomplishmentof this purpose. See oases collected in
 annotationsat 118 A.L.R. 506 and 128 A.L.R. 1126.
Honorable W. S. Heatly, Page 2 (WW-123)



           The principal difficulty with the proposed Sales
Limitation Act Is that though its stated purpose Is the elimination
of practloes "designed to lessen or destroy competition," the opera-
tive provisions are not limited to situations where limited sales
are made with an intent to injure competition or where that effect
Is achieved. This intent or effect has been a part of every statute
upheld by the courts of other jurlsdlctlons, snd in many cases the
courts have considered such an element to be an essential ingredient
to validity. See e.g. Blum v. Engleman, 190 Md. 109, 57 A.23 421
(1948 ; Associated Merchants v. Ormesher, 107 Mont. 530, 86 P.2d
1031 t1939); Wholesale Tobacco Dealers Bureau v. National Candy &
Tobacco Co., 11 Cal.2d 634, 82 P.2d 3 (1938). Only two cases have
been found where the statute before the court did not require a
wrongful intent or an injurious effect, and in each the statute
was held to be violative of due process requirements for that reason.
Commonwealth v. Zasloff, 338Pa. 457,13 A.2d 67 (1940); State ex rel
Llef v. Packard-Baumgardner & Co., 123 N.J.L. 180, 8 A.2d 291 (1939).
The basis for this holding was well expressed by the Pennsylvania
Supreme Court in the Zasloff case as follows:
              "If the Act confined itself to prohibiting
       sales below cost when Intended to destroy competition,
       it would undoubtedly be valid, as has been held in
       various jurisdictions where such ants have been en-
       acted with that qualification. (Citing oases)   The
       opinions of the courts In those eases emphasized the
       fact that the statutes there under consideration made
       criminal only such sales as'were designed for the
       suppression of competition or other predatory purposes,
       and the means employed by those statutes were therefore
       reasonably related to their objective. In New Jersey,
       on the other hand, where, as in Pennsylvania, this
       qualification was not In the act, the statute was de-
       clared unconstitutional. (Citing the Lief case)
       Price cutting in itself is not an evil; on the contrary,
       the more intense the competition the greater the likely
       advantage to the purchasing public. Indeed there is no
       reason why merchants should not make an absolute gift
       of merchandise to his customers If he desires to be
       benevolent or thereby to advertise his business. There
       are many other conceivable and wholly proper reasons
       which might Induce him to make sales without profit,
       as, for example, a necessity of paying importunate
       creditors. It Is only when the object of price cutting
       Is sinister, -- to destroy a ,competitorby suffering a
       temporary loss in order to gain an ultimate monopoly...,
       or to defraud the public by seducing them into the pur-
       chase of other goods at an exorbitant price-- that the
       selling of goods at less than cost may oonstitute an
       economic or social evil. The Pennsylvania Act, there-
       fore, is arbitrary, and the means which it employs are
       grossly out of proportion to the object which it seeks
       to attain."
Honorable W. S. Heatly, Page 3 (WW-123)




           We believe this reasoning to be applicable to the
proposed Sales Limitation Act unless other features of the Bills
are effective to exclude such lawful practices from their effect.

           The proposed Act differs from the statutes before the
courts In the above cases principally in that those statutes pro-
hibited all sales below cost while in the Instant Bills only sales
below cost in limited quantities are within the reach of the
statute.    It has.been argued that such a provision intensifies
the invalidity of the statute rather than aiding Its validity by
providing an unreasonable classification in not prohibiting un-
limited sales lntended'to destroy competition. It is, of course,
quite possible thata,powerful seller might make unlimited sales
of his productbelow cost until his competitors are forced out of
business, but it Is believed that this argument overlooks the fact
that it is not required that the Legislaturepl-ohibitall forms of
unfair comp+t?.tionIn order to reach specific abuses it considers
to be threatening. As stated by the Supreme Court in Central
Lumber Co. v. South Dakota, 226 U.S. 157, 33 s.ct. 65 -(iffy
              "If the Legislature shares the now prevailing
       belief as to what is public policy, and finds that a
       particular instrument of trade war Is being used
       against that policy in certain cases, it may direct
       its laws against what it deems the evil as it actually
       exists without covering the whole field of possible
       abuses, and it may do so none the less that the for-
       bidden act does not differ in kind from those that are
       allowed."
           The problem, therefore, is not whether some classes of
unfair competitors are excluded from the Bills, but whether the
device of prohibi.tingonly limited below cost sales removes from
the statutory ambit those practices innocent of destructive intent
or effect on competition referred to in the Zasloff case. No case
has been found where this feature has been considered by a court,
but it is apparent that,.by removing unlimited sales from the Bill's
prohibition, unquestioned fair methods of competition, such as
sales below cost to clear inventories of slow-moving, damaged, im-
perfect or short stock,,or to liquidate a business, are removed
from the scope of the Bill.
           However, It is also apparent that other legitimate
competitive practices are still prohibited by the prox;~;i Act.
For instance, an attempt to attract business through
leaders" would seem to be as legitimate a competitive device as
advertising, credit services, attractive surroundings and the like
where there is no attempt thereby to monopolize the market. Further-
more, sales below cost made In good faith to &    competition do not
appear to be adequately excluded by the proposed Act. Section 7
                                                                     ..-   .


Honorable W. S. Heatly, Page 4 (WW-123)




which purports to exclude such sales is ineffective for this pur-
pose since it requires a business man to determine at his peril that
the competing price is at cost or above before lowering his price to
meet the competing price without providing any method whereby he can
ascertain whether the competing price is lawful. See State ex rel Lief
v. Packard-Baumgardner & Co., supra. We find no feature in the Act
which would save such below cost sales which are not intended to in-
jure competition from its effect, and we must conclude that the Bill
as written is unconstitutional as violative of due process of law.
Tex. Const. Art. I, Section 19; U.S. Const. 14th Amend.   In view
of our holding, it is unnecessary to consider other constitutional
objections which have been raised against the Bill.

                               SUMMARY
                    The proposed Sales Limitation Act in-
                    corporated in House Bill 25 and Senate
                    Bill 177 violates the requirements of
                    due process of law provided in Article
                    I, Section 19, of the Texas Constitution,
                    and the 14th Amendment to the U.S. Con-
                    stitution, since it includes within its
                    prohibition practices which are not
                    reasonably related to its purpose of
                    preventing unfair competition.
                                         Very truly yours,
                                         WILL WILSON
                                         Attorney General of Texas


JWW:tiw
APPROVED:
OPINION COMMITTEE
H. Grady Chandler, Chairman




REVIEWED FOR THE ATTORNEY GENERAL
BY:
       Geo. P. Blackburn       ,
