BILL ANALYSIS
AB 926
Page 1
Date of Hearing: April 28, 2009
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Mary Hayashi, Chair
AB 926 (Ruskin) - As Introduced: February 26, 2009
SUBJECT : State contracts: goods: loss leader.
SUMMARY : Requires solicitations for bills on state contracts
to include a statement that using a "loss leader" is prohibited.
Specifically, this bill :
1)Requires the statement, "It is unlawful for any person engaged
in business within this state to sell or use any article or
product as a 'loss leader'" to be included in the following
types of contracts:
a) Solicitations that appear in the California State
Contracts Register (Register);
b) Requests for proposals (RFPs) relating to the furnishing
of equipment, materials, or supplies; and,
c) Information technology (IT) contracts.
2)Makes other technical, non-substantive changes relating to the
Small Business Procurement Act (Small Business Act).
EXISTING LAW :
1)Establishes the State Contract Act for the purpose of
providing guidance on state contracting for goods, services,
and IT.
2)Prohibits a person engaged in business to sell any product at
less than the cost or give away any product for the purpose of
injuring competitors or destroying competition.
3)Defines "loss leader" as selling a product at less than cost:
a) Where the purpose is to induce, promote or encourage the
purchase of other merchandise;
b) Where the effect is a tendency or capacity to mislead or
deceive purchasers or perspective purchasers; or,
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c) Where the effect is to divert trade from or otherwise
injure competitors.
4)Requires the Department of General Services (DGS) to advertise
contracts for goods worth at least $25,000, in the Register
and to publicly post a copy of the solicitation.
5)Requires DGS to administer the Small Business Act, including a
certification process for disabled veteran-owned business
enterprises (DVBEs) and small businesses, and a streamlined
procurement process for state contracts under $100,000 that
are exempt from advertising, bidding, and protest provisions
in the State Contract Act.
6)Defines a small business as a business entity that is
independently owned, not dominant in its field of operation,
domiciled in California, employing 100 or fewer employees, and
earning $10 million or less in average annual gross revenues
for the three previous years. A DVBE is defined as a business
entity that is at least majority owned or controlled by one or
more disabled veterans.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of the bill . The author believes that existing law has
not provided adequate protections and based this bill on the
findings of an internal DGS audit regarding its bundled contract
with Office Depot in 2008. According to the author's office,
"The loss leader law is the protection guaranteed to small
businesses that larger businesses cannot undercut market prices
to drive competitors out of business (and) win state contracts
with low bids, and (then) attempt to charge the state higher
prices later to recoup those costs."
Background . In August 2008, DGS released an internal compliance
audit of an office supply contract with Office Depot. In this
contract, DGS consolidated the state's primary office supply
purchases into a single contract with the expectation that the
state would receive significant discounts. The audit
investigated whether the contract complied with state pricing
rules and small business and DVBE contracting requirements. DGS
found that Office Depot was accurately pricing products that had
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been approved as core and non-core items. The total cost core
and non-core purchases through February 2008 was $26.4 million.
However, the audit identified $34,399 in charges that were
neither core nor non-core purchases.
The audit revealed that Office Depot had advertised
"off-contract" products in the state supply catalog, resulting
in high numbers of contract officers selecting these products
over the core and non-core products covered by the state
contract. The audit noted that Office Depot had sold
approximately 16,000 items for a total of $14.2 million to state
agencies without applying prescribed discounts. While Office
Depot initially stated that they were not aware of any
limitations to offering "off-contract" products in their catalog
and online ordering website, Office Depot began to work with DGS
on addressing this problem during the course of the audit.
Based on the audit findings, the state negotiated a $2.5 million
return. The audit specifically stated that Office Depot had
operated in a good faith manner.
The audit also investigated the office supply pricing and the
use of small businesses and DVBEs as vendors. The author
contends that the audit should have addressed whether Office
Depot engaged in illegal activities by using low cost products
as a loss leader to win the contract and profit off of
"off-contract" products when the contract went into effect.
According to the author, when DGS asked the auditors whether
they had audited for violations of the loss leader law, the
auditors responded that they were not aware of the law. The
author states that AB 926 addresses this lack of knowledge of a
1950's law by placing a reference to it within the State
Contracting Code.
The Small Business Act, administered through DGS, was
established 30 years ago to grant a small business preference
within the state's procurement process. In 1989, a DVBE
component was added to state procurement practices.
Historically, many state agencies have used their office supply
contracts to meet their annual 25% procurement target for small
businesses and their 3% target for DVBEs. Many small businesses
believe they will lose important business opportunities when a
state bundles an office supply contract. Small businesses are
potentially already at a disadvantage when competing with larger
office suppliers who have access to bulk discounts.
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Support . According to the California Small Business
Association, "This bill will help the small business community
by enforcing an existing law as it pertains to 'loss leader' and
clarify the definition of Commercially Useful Function. This
bill will also help small business compete for and secure state
contracts which means more jobs and revenue for the State of
California."
Related Legislation . AB 31 (Price) makes several key changes to
state procurement procedures, including increasing the maximum
contract threshold amount for awards to small business and DVBE,
from $100,000 to $250,000. This bill also requires contractors
to include small business or DVBE participation in reporting
requirements. This bill is pending in the Assembly
Appropriations Committee.
AB 309 (Price) establishes a 25% small business participation
goal for all state entities and directs DGS to monitor progress
in meeting this goal. This bill is pending in the Assembly
Business and Professions Committee.
SB 356 (Wright) requires an agency to consult with affected
persons and businesses when considering regulations if the
proposal is large or complex. This bill is pending in the
Senate Business, Professions and Economic Development Committee.
SB 642 (Denham) increases the maximum contract threshold amount
for awards to small business, including microbusiness and DVBEs
under the streamlined procurement process, from $100,000 to
$250,000. This bill also requires contractors to include small
business or DVBE participation in reporting requirements. This
bill is pending in the Senate Governmental Organization
Committee.
Prior Legislation . AB 1942 (Ruskin) of 2008 would have
increased penalties for persons engaging in fraudulent
activities relating to the Small Business Act, including DVBEs.
The Governor vetoed a substantial number of bills that year with
the same message that, due to the delay in passing the 2008-09
State Budget, he would only sign bills that were "the highest
priority for California. AB 1942 was vetoed for this reason.
AB 2773 (Price) of 2008 would have increased the maximum
contract threshold amount for awards to small business,
including microbusiness and DVBEs under the streamlined
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procurement process, from $100,000 to $250,000. Further, the
bill also would have required contractors to include small
business or DVBE participation in reporting requirements. This
bill was held in the Senate Appropriations Committee.
AB 761 (Coto), Chapter 611, Statutes of 2007, required each
state agency awarding contracts that are financed with proceeds
from the infrastructure bonds approved by voters in November
2006 to establish a 25% small business participation goal for
state infrastructure construction contracts and to provide
specified assistance to small businesses bidding on state
infrastructure bond-related contracts.
SB 115 (Florez), Chapter 451, Statutes of 2005, made various
changes to the DVBE Program, and required DGS to establish a
state agency-wide mandatory DVBE participation incentive. This
bill required the DGS Small Business Advocate to provide
specified services to small businesses and certified DVBEs.
This bill also required DGS to adopt a streamlined reporting
procedure for state agencies to use in reporting their DVBE
participation to the Department of Veterans Affairs.
REGISTERED SUPPORT / OPPOSITION :
Support
California Black Chamber of Commerce (sponsor)
California Small Business Association (sponsor)
Opposition
None on file.
Analysis Prepared by : Joanna Gin / B. & P. / (916) 319-3301