An Arkansas judge Tuesday found Wal-Mart Stores guilty of using predatory pricing to force competitors out of business, possibly paving the way for more lawsuits against price-cutting discounters.
In his ruling, Chancery Court Judge David Reynolds ordered Wal-Mart to stop selling drugs and health and beauty products below cost at its store in Conway, Ark., and to pay nearly $300,000 in damages to three drugstores in that community.
The three stores had filed suit, accusing Wal-Mart of scheming to drive them out of business by selling below cost. Reynolds said Wal-Mart violated the law, which bars selling items at a loss with the intent of harming competitors. Wal-Mart shares fell 75 cents to close at $25.75 on the New York Stock Exchange.
"We will immediately appeal and clearly expect the Arkansas Supreme Court to overturn this anti-consumer decision," said Robert K. Rhoads, Wal-Mart's general counsel. "If this decision is allowed to stand, the result will be higher prices--not just for Wal-Mart customers, but customers of every retail store, large and small, in Arkansas."
The case, similar to lawsuits pending against Wal-Mart in Colorado and Oklahoma, could encourage other small retailers to file predatory-pricing claims against discount giants. In all, 25 states--including California--have similar unfair-practices statutes.
"Below-cost pricing would be considered part of unfair pricing in any state that has unfair-practices laws," said Henry Cheeseman, a business law professor at USC. "You're going to see more lawsuits against discounters as a result of this ruling, but there is no way to predict the outcome of these cases."
Wal-Mart, the nation's largest retailer, has been blamed for the demise of some long-established businesses in small cities around the country, and many of those merchants will try to use the Arkansas case as a precedent, said George Lucas, a Memphis State University business professor who has served as a witness in predatory-pricing cases.
"I would be shocked if this ruling did not become a catalyst for more cases of this type," Lucas said. Other industry observers, however, do not expect an immediate spate of lawsuits against low-price leaders. Larry Gresham, director of the Center for Retailing Studies at Texas A&M; University, said many potential litigants will wait for the outcome of Wal-Mart's appeal.
"If Wal-Mart loses, writes a check for court-ordered damages and complies without contesting it further, you might see widespread effort to bring litigation," Gresham said.
Wal-Mart will prevail because selling below cost has been a common practice, said Richard Nelson, an industry analyst at Duff & Phelps in Chicago.
"This practice has a long history," Nelson said. "To win this kind of lawsuit, you have to prove that a retailer is trying to harm a competitor, and that's difficult."
However, the Arkansas judge said there was evidence of harmful intent in the Conway case. He cited the following:
* The number, frequency and extent of below-cost sales
* Wal-Mart's stated pricing policy to "meet or beat the competition without regard to cost"
* Wal-Mart's in-store price comparison of goods sold by competitors, including the plaintiffs in the suit
* A variation in prices between the Conway area and other markets
Wal-Mart Chief Executive David Glass testified during the August trial that the company sold some items below cost but that it didn't do it to drive others out of business.