BILL ANALYSIS
AB 926
Page 1
Date of Hearing: May 13, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 926 (Ruskin) - As Introduced: February 26, 2009
Policy Committee: Business and
Professions Vote: 11 - 0
Jobs 7 - 0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill requires certain advertising of state contracting
opportunities to include the following 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'."
FISCAL EFFECT
Minor costs, likely less than $75,000 GF, for updating
materials, developing policies, and the workload associated with
disputes, inquiries, and general assistance.
COMMENTS
1)Intent . 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."
2)Background . There have been reports of questionable billing
practices and charges of over-billing from Office Depot in
North Carolina, Georgia, Florida, and Nebraska. The state of
Georgia recently cancelled its contract with Office Depot
because they determined they had been significantly
over-billed for supplies and equipment. Recently, in Nebraska
AB 926
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the state auditor concluded an investigation that determined
the state overpaid for office supplies and equipment because
of a series of pricing errors and overcharges from Office
Depot. The author's office contends the cancelled office
supply contract in Georgia is almost identical to California's
current contract and that it was set up by the same law firm.
In 2006, state officials announced they had been successful in
getting small businesses involved in selling office supplies
to state agencies. In addition, it was noted that these small
businesses would be partnering with Office Depot, whose
purchasing power would allow the state to significantly reduce
the cost of office supplies and equipment. A San Jose Mercury
News investigation found that nine small businesses that
handle 98% of the state contracts for office supplies and
equipment were not actually responsible for any of the orders
placed by the state departments. Their investigation showed
that none of the employees of any of the companies works at
the Lafayette office where the orders are processed. That
office is staffed by an Office Depot subcontractor. In
addition, a review of expenditures shows a 20% increase in the
cost of office supplies over the last two years.
3)Loss Leader Strategy . A loss leader strategy is a business
strategy in which a business offers a product or service at a
price that is not profitable for the sake of offering another
product/service at a greater profit or to attract new
customers. This is a common practice when a business first
enters a market; a loss leader introduces new customers to a
service or product in the hope of building a customer base and
securing future recurring revenue.
A classic example is that of razor blades. Companies like
Gillette essentially give their razor units away for free,
knowing that customers will have to buy their replacement
blades, which is where the company makes all of its profit.
In this instance, as noted above, a loss leader strategy would
be employed to undercut small businesses by offering services
and products at such a reduced price that the smaller
competitors cannot compete and are driven out of business.
4)Related Legislation . AB 1942 (Ruskin) of 2008 would have
increased penalties for persons engaging in fraudulent
activities relating to the Small Business Act, including
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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.
Analysis Prepared by : Julie Salley-Gray / APPR. / (916)
319-2081