BILL ANALYSIS
Bill No: AB
926
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2009-2010 Regular Session
Staff Analysis
AB 926 Author: Ruskin
As Introduced: February 26, 2009
Hearing Date: June 23, 2009
Consultant: Art Terzakis
SUBJECT
State Contracts: goods: loss leader
DESCRIPTION
AB 926 requires certain advertising of state contracting
opportunities to include a statement explaining current
state law against the use of "loss leaders." Specifically,
this measure:
1. Stipulates that with respect to a solicitation for a
state contract for goods, a request for proposal for a
contract for services that involves the furnishing of
equipment, materials, or supplies and a request for
proposal for a state contract for the acquisition of
information technology goods and services the following
statement must appear in every solicitation: "It is
unlawful for any person engaged in business within this
state to sell or use any article or product as a 'loss
leader' as defined in Section 17030 of the Business and
Professions Code. (Loss leaders are items sold at less
than cost).
2. Also, makes several minor technical and code
maintenance changes to various statutes.
EXISTING LAW
Existing law establishes the State Contract Act for the
purpose of providing guidance on state contracting for
AB 926 (Ruskin) continued
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goods, services, and information technology (IT).
Existing law 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.
Existing law 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, (c) where the
effect is to divert trade from or otherwise injure
competitors.
Existing law 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.
Existing law also 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.
Existing law 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.
BACKGROUND
Purpose of AB 926: 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 or win state
contracts with low-ball bids, and attempt to charge the
state higher prices later to recoup those costs.
The impetus for this measure stems from two separate
AB 926 (Ruskin) continued
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incidences of fraud and abuse. Last year, the state
bundled together its four major paper contracts that it had
previously bid separately into one single contract. In the
summer of 2008, the state awarded that contract. Several of
the companies which lost the bid argued that the winning
company was offering certain types of paper, notably
newsprint, at substantially below cost, thus allowing them
to win the contract. When the state submitted its first
order for newsprint pursuant to that contract - to print
the ballot statements for the 2008 general election - the
company that won the contract filed a price change, raising
the price of newsprint to levels above what other companies
had bid.
The state ruled this as a violation and canceled that part
of the contract. Because of constitutional requirements
for mailing ballot statements, the state had to rush a bid
for newsprint and then rush the printing of the ballots
which led to additional printing costs of over $800,000.
Another such incident occurred with the acquisition of
office supplies. Among several major inconsistencies found
during an investigation of the state's office supply
contract with Office Depot, was the discovery of
'bait-and-switch' pricing for some products. Products were
offered at below cost prices, but these products were found
to be discontinued or sold out when state buyers tried to
purchase them.
The Florida Attorney General is currently investigating
this in their office supply contract with Office Depot, and
the City of Berkeley recently revoked their contract with
Office Depot over this same issue. Despite concern that
the loss leader law is being violated; the author's office
argues that a lack of knowledge about the law or its
obligations results in a lack of enforcement of the law.
When asked during DGS's audit of the Office Depot contract
whether they audited for violations of the loss leader law,
the auditors asked if the law was new. The law was passed
during the 1950s and updated during the 1960s. This
measure is intended to address these issues by informing
everyone of the loss leader law and by bringing it to the
attention of all parties, state administrators, and those
bidding on state contracts.
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PRIOR/RELATED LEGISLATION
AB 31 (Price) 2009-10 Session. Would make substantive
changes to existing provisions of law relating to state
procurement procedures in order to increase small business
and disabled veteran-owned business enterprise (DVBE)
participation in state contracting. (Pending in this
committee)
SB 642 (Denham) 2009-10 Session. Identical to AB 31
(Price) of 2009. (Held in Senate Appropriations Committee
- suspense file)
AB 2773 (Price) 2007-08 Session. Identical to AB 31
(Price) of 2009. (Held in Senate Appropriations Committee
- suspense file)
AB 1942 (Ruskin) 2007-08 session. Would have increased the
penalties for misrepresenting the involvement of a small
business or a disabled veteran business enterprise (DVBE)
in state contracts. (Vetoed by Governor on the basis that
the delay in passing the 2008-2009 State Budget forced him
to prioritize bills and only sign bills that met his
standard of "highest priority for California.")
AB 608 (De La Torre) 2007-08 Session. Would have increased
the procurement contract bid preference from 5% to 10% for
small businesses and microbusinesses, or non-small
businesses that utilize small businesses and
microbusinesses as subcontractors, when the contract award
is made on the basis of either determining the lowest
responsible bidder, or when the contract is made on the
basis of determining the highest scored bidder, based on
evaluation factors other than bid price. (Vetoed by the
Governor)
AB 761 (Coto) Chapter 611, Statutes of 2007. Requires 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.
SUPPORT: As of June 19, 2009:
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California Black Chamber of Commerce (co-sponsor)
California Small Business Association (co-sponsor)
OPPOSE: None on file as of June 19, 2009.
FISCAL COMMITTEE: Senate Appropriations Committee
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