ALEXANDRA FISHER et al., Plaintiffs and Appellants, v. CITY OF BERKELEY et al., Defendants and Respondents, 37 Cal. 3d 644

Opinion MOSK, J. Plaintiffs, a group of landlords who own property in the City of Berkeley, appeal from a judgment of the Alameda County Superior Court holding defendants’ rent control ordinance constitutional on its face. We substantially affirm the judgment. Plaintiffs claim that defendants’ ordinance conflicts with, and hence is preempted by, federal antitrust law because it is a combination that unreasonably restrains interstate commerce in violation of

section 1 of the Sherman Antitrust Act (Act or Sherman Act). (15 U.S.C.) They also claim that it constitutes monopolization, or attempted monopolization, in violation of

section 2 of the Act. {Ibid.) Although price fixing by private business enterprises is clearly illegal per se, we hold that the per se rule of illegality does not apply to the municipal defendants’ price-fixing ordinance in this case. Nor can such a municipal regulation be reviewed pursuant to the traditional rule of reason, under which validity would be judged solely by the regulation’s effect on competition.

Instead, we have determined that when the validity of an ordinance is challenged under the federal antitrust laws, courts must adapt traditional antitrust rules in order to accommodate municipal governments’ legitimate interest in enacting economic and social regulations concerning local health, safety and welfare. We conclude that if a municipal regulation has a proper local purpose, is rationally related to the municipality’s legitimate exercise of its police power, and operates in an evenhanded manner, it must be upheld against a claim that it conflicts with

section 1 or 2 of the Sherman Act unless the plaintiff demonstrates that the city’s purposes could be achieved as effectively by means that would have a less intrusive impact on federal antitrust policies. No such means have been proposed. Under the foregoing test the ordinance in question has not been shown to conflict with federal antitrust laws.

We also conclude that defendants’ ordinance is facially constitutional under both the federal and state due process clauses: a rent control ordinance is valid if it guarantees each landlord a fair return on his investment; it need not guarantee a fair return on the value of property. Furthermore, the ordinance on its face provides for reasonably prompt access to adjustment procedures for those landlords seeking to increase rents. Additionally, we conclude that the rent withholding provisions of the ordinance do not violate landlords’ due process rights, nor are such provisions preempted by general state law.

Finally, however, we have determined that the ordinance is invalid to the extent it purports to create an evidentiary presumption affecting the burden of proof in regard to retaliatory evictions, but that such a provision is severable, and does not affect the validity of the remainder of the ordinance. Background and Procedure In June 1980 the Berkeley electorate enacted initiative “Measure D,” the “Rent Stabilization and Eviction for Good Cause Ordinance,” (hereafter ordinance). The ordinance affects approximately 23,000 rental units.

Section 3 sets out the purpose of the ordinance: It is intended “to regulate residential rent increases in the City of Berkeley and to protect tenants from unwarranted rent increases and arbitrary, discriminatory, or retaliatory evictions, in order to help maintain the diversity of the Berkeley community and to ensure compliance with legal obligations relating to the rental of housing. This legislation is designed to address the City of Berkeley’s housing crisis, preserve the public peace, health and safety, and advance the housing policies of this City with regard to low and fixed income persons, minorities, students, handicapped, and the aged.”

Section 5 exempts from the ordinance government-owned units, transient units, cooperatives, hospitals, certain small owner-occupied buildings, and all newly constructed buildings.

Section 6 establishes a rent stabilization board (Board) of nine commissioners, and sets out its powers, duties, rules and procedures, as well as a means of ending rent control if the city’s vacancy rate surpasses 5 percent.

Section 8 requires landlords to register with the Board, furnish specified information, and pay a registration fee for each unit.

Section 10 establishes base rent ceilings that landlords may not exceed except as permitted by the Board under sections 11 and

Section 11 provides for annual general adjustment of rent ceilings to cover increases or decreases relating to utilities and taxes. In making such general adjustment, the Board is given authority to adopt a general formula based on available data relating to such expenses. If a landlord is not satisfied with this general increase, he may petition the Board for an individual adjustment under

section 12. In ruling on this petition the Board must consider many nonexclusive factors, including a landlord’s individual costs, but in no event may it deny a rent increase needed to allow a landlord a “fair return on investment. ”

Section 13 prohibits evictions except for enumerated factors constituting “good cause.”

Section 14 prohibits retaliatory evictions, and states that any eviction action taken against a tenant within six months of the tenant’s assertion of rights under the ordinance shall be “presumed” to be retaliatory.

Section 15 sets out remedies, including rent withholding, both for a landlord’s violation of rent ceilings and failure to register.

Section 16 is a severability clause.

Section 17 declares that the provisions of the ordinance may not be waived.

Section 18 provides for judicial review of any act of the Board. Plaintiffs filed suit in August 1980 seeking injunctive and declaratory relief against enforcement of the ordinance. They alleged the ordinance is unconstitutional on its face and as applied. The trial court granted defendants’ motion for judgment on the pleadings, declaring the ordinance constitutional on its face. The court granted plaintiffs leave to amend to allege facts showing that the ordinance is unconstitutional as applied, but plaintiffs subsequently dismissed this aspect of the complaint.

Plaintiffs appeal from the trial court’s order granting defendants judgment on the pleadings. The sole question before us, therefore, is whether the ordinance is invalid on its face. After the case was fully briefed on the merits in the Court of Appeal, but before that court rendered its decision, the United States Supreme Court decided Community Communications Co. v. City of Boulder (1982) 455 U.S. 40 [70 L.Ed.2d 810, 102 S.Ct. 835], holding a home rule municipality subject to federal antitrust scrutiny.

We granted hearing, and soon thereafter the issue of the effect of Boulder, and antitrust law generally, was raised for the first time by amicus curiae. Both parties and additional amici curiae for both parties were granted leave to file, and have filed, supplemental briefs addressing inter alia antitrust issues generally, and the Boulder issue specifically.

Therefore, although plaintiffs claim the ordinance is facially invalid in whole or in part on due process and statutory grounds, they also assert that an alleged conflict between the ordinance and federal antitrust law presents a threshold issue dispositive of this appeal. Defendants likewise request that we address and resolve plaintiffs’ antitrust contentions. Because of the extreme importance of the issues presented, we proceed to analyze plaintiffs’ antitrust claims. I. Antitrust Issues In Birkenfeld v.

City of Berkeley (1976) 17 Cal.3d 129 [130 Cal.Rptr. 465, 550 P.2d 1001], we held Berkeley’s former rent control ordinance facially unconstitutional because its procedures for rent adjustment were “inexcusably cumbersome” and would have deprived landlords of due process if permitted to take effect. (Id. at p. 173.) Before reaching that conclusion, however, we addressed the threshold question of the city’s power to provide for rent control.

We observed that our Constitution confers on all cities and counties the power to “make and enforce within [their] limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws” (Cal. Const., art.

XI, § 7) and noted that “[a] city’s police power under this provision can be applied only within its own territory and is subject to displacement by general state law but otherwise is as broad as the police power exercisable by the Legislature itself.” (17 Cal.3d at p. 140.) Although there is extensive regulation governing various aspects of landlord-tenant relations, “California has no state rent control statute.” (Id. at p. 141.) We therefore concluded that the Berkeley ordinance was within the city’s police power: there was “no legislative indication of ‘a paramount state concern [which] will not tolerate further or additional local action.’” (Id. at p. 142, quoting In re Hubbard (1964) 62 Cal.2d 119, 128 [41 Cal.Rptr. 393, 396 P.2d 809].) Conceding that local rent control is not preempted by state law, plaintiffs champion federal antitrust law in order to attack Birkenfeld’s premise that the police power of a city is as broad as that power exercisable by the Legislature.

Plaintiffs observe that although our state Constitution grants cities police power equal to that of the state, we are duty-bound under the supremacy clause of the federal Constitution (art. VI, cl. 2) to invalidate a municipal regulation that on its face violates paramount federal law. (Sail’er Inn, Inc. v.

Kirby (1971) 5 Cal.3d 1, 10-11 [95 Cal.Rptr. 329, 485 P.2d 529, 46 A.L.R.3d 351].) They argue that (1) the city’s ordinance, on its face, conflicts with federal antitrust law; that (2) under Boulder, the ordinance is not exempt from antitrust scrutiny, and hence (3) defendants have no authority to enforce the regulation in question. We clearly have jurisdiction to decide such claims. (Rice v. Norman Williams Co. (1982) 458 U.S. 654, 659-661 [73 L.Ed.2d 1042, 1049-1051, 102 S.Ct. 3294]; see Rice v. Alcoholic Bev. etc.

Appeals Bd. (1978) 21 Cal.3d 431, 439-446 [146 Cal.Rptr. 585, 579 P.2d 476, 96 A.L.R.3d 613] [state retail price maintenance scheme for distilled liquor invalidated under § 1 of the Sherman Act]; Midcal Aluminum, Inc. v. Rice (1979) 90 Cal.App.3d 979, 982-984 [153 Cal.Rptr. 757] [enjoining enforcement of state wholesale price maintenance scheme for wine as invalid under § 1 of the Act], affd. sub nom. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc. (1980) 445 U.S. 97 [63 L.Ed.2d 233, 100 S.Ct. 937]; Capiscean Corp. v. Alcoholic Bev. etc.

Appeals Bd. (1979) 87 Cal.App.3d 996, 999-1000 [151 Cal.Rptr. 492] [invalidating state retail price maintenance scheme under Rice v. Alcoholic Bev. etc. Appeals Bd., supra, 21 Cal.3d 431].) A. State Action, Municipal Action, and Federal Antitrust Law In order to prohibit private businesses from practicing various anticompetitive activities in interstate commerce, nearly a century ago the United States Congress exercised its broad authority under the commerce clause (U.S. Const., art. I, § 8, cl. 3) to enact the Sherman Act. (Pub.L.

No. 51-190, 26 Stat. 209 (1890) codified as amended at 15 U.S.C. §§ 1-7; see Parker v. Brown (1943) 317 U.S. 341, 351 [87 L.Ed. 315, 326, 63 S.Ct. 307], citing Remarks of Sen. Sherman, 21 Cong, Rec. 2457, 2562 (1890).) Two sections of the Act are relevant to the present case.

Section 1 declares all contracts, combinations or conspiracies in restraint of interstate commerce to be illegal.

Section 2 declares that the act of monopolizing, or attempting to monopolize any part of interstate commerce is illegal. Quite obviously, if defendants’ ordinance conflicts with the Act, and further, if it is not exempt from antitrust scrutiny, the supremacy clause of the federal Constitution requires that we declare the ordinance invalid. Over 40 years ago, the Supreme Court in Parker, supra, held this state’s raisin marketing program, which restricted competition and maintained prices in order to protect the local raisin market, was not subject to federal antitrust scrutiny.

The court found “nothing in the language of the Sherman Act or in its history which suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature.

In a dual system of government in which, under the Constitution, the states are sovereign, save only as Congress may constitutionally subtract from their authority, an unexpressed purpose to nullify a state’s control over its officers and agents is not lightly to be attributed to Congress, [f] The Sherman Act makes no mention of the state as such, and gives no hint that it was intended to restrain state action or official action directed by a state. ... [1] There is no suggestion of a purpose to restrain state action in the Act’s legislative history.” (317 U.S. at pp. 350-351 [87 L.Ed. at p. 326].) The Parker court concluded that “[t]he state in adopting and enforcing the . . . program . . . as a sovereign, imposed the restraint as

an act of government which the Sherman Act did not undertake to prohibit.” (Id. at p. 352 [87 L.Ed. at p. 327].) In a series of cases over the last decade the United States Supreme Court has considered the extent to which private, or nongovernmental, business enterprises may come under the protection conferred in Parker. And in two recent decisions, the court has addressed the conditions under which local governments may gain Parker protection. The first case, City of Lafayette v.

Louisiana Power & Light Co. (1978) 435 U.S. 389 [55 L.Ed.2d 364, 98 S.Ct. 1123], involved two Louisiana municipalities that owned and operated their own electric utility systems. Louisiana Power alleged that the municipalities had engaged in illegal tying arrangements with their customers.

The majority rejected the municipalities’ contention that antitrust laws were intended to protect only against abuses by private businesses and are not applicable to municipalities that “exist to serve the public weal.” (Id. at p. 403 [55 L.Ed.2d at p. 376].) The court observed that the defendants were not motivated solely by desire to benefit the public.

Instead, like “[e]very business enterprise” (ibid.), their decisions may be motivated by the goal of “realizing maximum benefits to [themselves] without regard to extraterritorial impact and regional efficiency. ” (Id. at p. 404 [55 L.Ed.2d at p. 377].) A majority therefore rejected the argument that the two municipalities—both of which “act[ed] as owners and providers of services” (id. at p. 408 [55 L.Ed.2d at p. 379]), were immune from antitrust scrutiny.

A plurality opinion by Justice Brennan then rejected the contention that municipalities, simply by reason of their status as such, are exempt from antitrust laws. “Parker’s limitation of the exemption ... to ‘official action directed by [the] state,’ arises from the basis for the ‘state action’ doctrine— that given our ‘dual system of government in which, under the Constitution, the states are sovereign, save only as Congress may constitutionally subtract from their authority,’ 317 U.S., at 351, a congressional purpose to subject to antitrust control the States’ acts of government will not lightly be inferred.

To extend that doctrine to municipalities would be inconsistent with that limitation. Cities are not themselves sovereign; they do not receive all the federal deference of the States that create them.” (435 U.S. at pp. 411-412 [55 L.Ed.2d at p. 382].) Still, the plurality suggested, a municipality could come under the Parker exemption if it acts pursuant to state policy to displace competition with regulation or monopoly public service.

Deviating slightly from the court’s requirement in the private business enterprise cases that the state must have “compelled” the conduct in order for the activity to come within the Parker exemption {ante, pp. 657-658, fn. 5), the plurality stated that state direction or authorization of the anticompetitive conduct would be sufficient to trigger the exemption for municipalities. (Id. at p. 417 [55 L.Ed.2d at pp. 385-386],) In a concurrence, Chief Justice Burger emphasized his view that the municipalities’ ownership and operation of utility companies constituted business activities pursuant to their proprietary functions (id. at p. 422-425 [55 L.Ed.2d at pp. 388-391]), and hence any question of exemption should meet the more stringent “compulsion” standard applicable to private parties seeking the protection of Parker.

The Chief Justice appeared to suggest that municipalities’ nonproprietary activities should be exempt from antitrust scrutiny. Four years later the United States Supreme Court decided Community Communications Co. v. City of Boulder, supra, 455 U.S. 40. The city, apparently acting in its regulatory capacity, placed a moratorium on expansion of plaintiff’s cable television service for three months in order to allow competing companies to make bids to enter a new geographic market under a proposed model ordinance.

Plaintiff sued to enjoin the moratorium, claiming inter alia that it constituted a conspiracy between the city and a potential competitor, and that it restrained trade in violation of

section 1 of the Sherman Act. The district court granted an injunction, rejecting the city’s argument that its actions were protected as a valid exercise of its police power, or that it was exempt from antitrust scrutiny under Parker.

A divided Tenth Circuit Court of Appeals reversed, distinguishing Lafayette on the ground that, in contrast to the activity in that case, “no proprietary interest of the City is here involved.” (630 F.2d 704, 708.) The United States Supreme Court in turn reversed, holding over the dissent of Justice Rehnquist that the city’s ordinance “cannot be exempt from antitrust scrutiny unless it constitutes the action of the State . . . itself in its sovereign capacity, see Parker, or unless it constitutes municipal action in furtherance or implementation of clearly articulated and affirmatively expressed state policy, see City of Lafayette . . . .” (Boulder, supra, 455 U.S. 40, 52 [70 L.Ed.2d 810, 819].) The court rejected the city’s argument that merely because the state, under its home rule amendment, had vested the city with “ ‘ “every power theretofore possessed by the legislature ... in local and municipal affairs’”” (id. at p. 52 [70 L.Ed.2d at p. 819], italics in original), regulation of cable television was therefore an “ ‘act of government’ performed by the city acting as the state in local matters . . . .” (Id. at p. 53 [70 L.Ed.2d at p. 820], italics in original.) Granting of home-rule power, the court reasoned, merely indicates neutrality respecting the challenged actions, and does not satisfy the “ ‘clear articulation and affirmative expression’ ” of state policy requirement. (Id. at p. 55 [70 L.Ed.2d at p. 821].) The court reiterated the Lafayette plurality’s view that the Parker exemption is premised on sovereignty, and that because municipalities are not sovereign, they fall outside the exemption. (Id. at pp. 50-51 [70 L.Ed.2d at p. 818].) Accordingly, much of the parties’ energy in the present case has been directed toward arguing their respective views as to whether defendants’ ordinance falls within or without the Boulder state action exemption.

Consideration of Boulder's exemption standard at this stage in our analysis, however, is premature. Application of the state action exemption principle becomes necessary only after we determine that there is “truly a conflict between the Sherman Act and the challenged regulatory scheme.” (First American Title Co. of South Dakota v. South Dakota Land Title Ass’n (8th Cir. 1983) 714 F.2d 1439, 1452; see also Rice v.

Norman Williams Co., supra, 458 U.S. 654, 662, fn. 9 [73 L.Ed.2d 1042, 1052]; Midcal, supra, 445 U.S. 97, 102 [63 L.Ed.2d 233, 241]; Parker, supra, 317 U.S. 341, 350 [87 L.Ed. 315, 325-326]; Rice, supra, 21 Cal.3d 431, 439-446; LewisWestco & Co. v. Alcoholic Bev. etc. Appeals Bd. (1982) 136 Cal.App.3d 829, 834-837 [186 Cal.Rptr. 552].) B. Facial Validity of the Ordinance Under

Section 1 of the Sherman Act Plaintiffs contend that the ordinance, on its face, conflicts with, and hence is preempted by,

section 1 of the Sherman Act. (See ante, fn. 8.) That

section states: “Every contract, combination ... or conspiracy, in restraint of trade or commerce among the several States . . . is . . . declared to be illegal.” (15 U.S.C. § 1.) Defendants and amici broadly respond that no provision of the Act was intended to apply to city ordinances designed to protect or further local health, safety, or general welfare, and hence the ordinance in question cannot violate the antitrust laws.

They suggest that only local legislation designed to achieve commercial or proprietary interests—either from city ownership of property or through fees or taxes pursuant to franchise awards—are properly subject to antitrust scrutiny. Although defendants’ view has rational appeal, we are bound by the United States Supreme Court’s implicit rejection of that theory in Lafayette and Boulder. In both of those cases the court addressed the applicability of state action exemption to municipal defendants.

However, in order to reach the question of exemption from antitrust laws, in both decisions the court necessarily assumed that each case presented a violation of antitrust laws. (E.g., First American Title Co., supra, 714 F.2d 1439, 1451-1452.) While standing alone, Lafayette could be read to support defendants’ view that only the commercial activities of municipalities are subject to antitrust scrutiny (Lafayette, 435 U.S. 389, 418-426 [55 L.Ed.2d 364, 386-391], Burger, C. J., conc.), we must conclude that Boulder forecloses any argument that the Act does not apply to a municipality’s “noncommercial” activities.

The alleged anticompetitive activity in that case concerned merely the imposition of a three-month moratorium on expansion of petitioner’s cable television franchise while the city studied the need for increased regulation. Whereas the facts of Boulder strongly suggest that the moratorium was imposed pursuant to the city’s regulatory authority, still the court’s resolution of the state action exemption issue necessarily assumed an antitrust violation; moreover, the court did not even mention the possibility of a broader, preliminary exemption from antitrust scrutiny for “nonproprietary” municipal activity.

Therefore, we must conclude that the United States Supreme Court necessarily and implicitly rejected defendants’ view in Boulder. (McMahon, Recent Significant Developments in “State Action” and Noerr-Pennington Exemptions: From Boulder to the “Sham” Exception (1983) 14 Toledo L.Rev. 531, 540-541.) As we shall explain below, however, defendants are correct when they assert that the antitrust laws are aimed chiefly at commercial activities. And, as demonstrated below, this fact must influence the question of how, and to what extent, traditional antitrust rules apply to municipal defendants.

We turn now to plaintiffs’ claim under

section 1 of the Sherman Act. To prove a facial conflict with

section 1 in the present case, plaintiffs must establish as a matter of law (

a) that two or more “persons” acted in concert, (

b) that the activities complained of affect interstate commerce, and (

c) that the action constitutes an unreasonable restraint on commerce. A court may invalidate an ordinance in the abstract “only if it mandates or authorizes conduct that necessarily constitutes a violation of the antitrust laws in all cases, or if it places irresistible pressure on a private party to violate the antitrust laws in order to comply with the statute.” (Rice v. Norman Williams Co., supra, 458 U.S. 654, 661 [73 L.Ed.2d 1042, 1051].) Both parties vigorously contest whether in this case plaintiffs can or cannot prove the requisite concerted action and effect on interstate commerce.

Although we do not agree with plaintiffs’ suggestion that these “technical” requirements should be ignored in a facial attack seeking “mere invalidation” instead of damages {ante, fn. 10), we need not address these issues now because we have determined that, in any event, plaintiffs cannot prove that the ordinance on its face mandates an unreasonable restraint of trade and hence irreconciliably conflicts with

section 1 of the Sherman Act. (458 U.S. at p. 661 [73 L.Ed.2d at p. 1051].) 1. Unreasonable Restraint a. Application of Traditional Antitrust Law to Municipal Defendants We recognize at the onset that this case forces us to wander off the map and travel cross country without the benefit of trail or compass.

Although Boulder clearly held municipalities subject to antitrust laws, the court specifically declined to address the issue of the applicability of traditional antitrust rules or standards against which municipal defendants are to be judged. (Boulder, supra, 455 U.S. 40, 56, fn. 20 [70 L.Ed.2d 810, 822].) Significantly, however, the Boulder court strongly suggested that municipalities and private business enterprises may be subject to different standards: the court repeated Lafayette's suggestion that “ ‘[i]t may be that certain activities which might appear anticompetitive when engaged in by private parties, take on a different complexion when adopted by a local government.’” (Ibid., citing Lafayette, supra, 435 U.S. 389, 417, fn. 48 [55 L.Ed.2d 364, 385].) Similarly, the Boulder dissent observed that under the majority’s rule, the courts “must now adapt antitrust principles to adjudicate Sherman Act challenges to local regulation of the economy.” (455 U.S. at p. 65 [70 L.Ed.2d at p. 828].) Anticompetitive conduct by a municipality in exercise of its legitimate police power is indeed of a “different complexion” than similar conduct engaged in by private business enterprises and therefore, as the Boulder court suggested, courts must adapt or modify the application of traditional antitrust rules when reviewing the acts of municipal defendants.

The United States Supreme Court has often noted that the purpose of antitrust law is the regulation of anticompetitive business practices. The Sherman Act relates to “ ‘business competition’ ” (Apex Hosiery Co. v. Leader (1940) 310 U.S. 469, 493, fn. 15 [84 L.Ed. 1311, 1323, 60 S.Ct. 982, 128 A.L.R. 1044]) and is designed to regulate “combinations of business and capital organized to suppress commercial competition . . . .” (United States v.

South-Eastern Underwriters Ass’n (1944) 322 U.S. 533, 553 [88 L.Ed. 1440, 1458, 64 S.Ct. 1162]; see also Parker, supra, 317 U.S. 341, 351 [87 L.Ed. 315, 326]; 1 Kintner, Federal Antitrust Law (1980) § 4.18 [summarizing an exhaustive analysis of the legislative history of the Act]; cf.

Bork, Legislative Intent and the Policy of the Sherman Act (1966) 9 J.L. & Econ. 7.) One commentator has observed that “[t]he Court has been reluctant to apply antitrust laws to the conduct of those who are not engaged in commercial activities.” (Vanderstar, Liability of Municipalities Under the Antitrust Laws: Litigation Strategies (1983) 32 Cath.U.L.Rev. 395, 397-398.) Indeed, the court has said that the Act “is aimed primarily at combinations having commercial objectives and is applied only to a very limited extent to organizations, like labor unions, which normally have other objectives.” (Klor’s, Inc. v.

Broadway-Hale Stores, Inc. (1959) 359 U.S. 207, 213, fn. 7 [3 L.Ed.2d 741, 745, 79 S.Ct. 705].) Similarly, the court noted in Goldfarb, supra, that it would be “unrealistic” to “automatically . . . apply to the professions antitrust concepts which originated in other areas.” (421 U.S. 773, 788, fn. 17 [44 L.Ed.2d 572, 585].) Traditional antitrust rules have been fashioned over the years in the context of private business regulation. Many of the rules are premised implicitly, sometimes explicitly, on assumptions about how rational business competitors behave in their quest for greater profit.

Municipal governments, on the other hand, most often act on the basis of different motives. Unlike a private business, a municipal government’s decision to displace competition is generally motivated by the purpose of furthering local health, safety or welfare. When acting in its regulatory capacity, a local government is both authorized to act in accordance with, and entrusted with the duty of serving, the public weal.

Just as courts should proceed cautiously lest they might unnecessarily interfere with rights of local self-governance (Frug, The City as a Legal Concept (1980) 93 Harv.L.Rev. 1059; Cirace, An Economic Analysis of the “State-Municipal Action” Antitrust Cases (1982) 61 Tex.L.Rev. 481, 490, fn. 50, 514; 1 DeTocqueville, Democracy in America (Mayer ed., Lawrence trans. 1969) pp. 90-91 and passim), so too courts must be attentive and sensitive to the legitimate motives behind municipal regulations.

Therefore, contrary to the urging of plaintiffs and amici, we will not mechanically apply to municipalities rules of law fashioned exclusively in the different context of private business regulation. Such standards will no doubt be helpful in formulating rules for the application of antitrust principles to municipalities, but if unbending application of traditional standards would prove too inflexible to accommodate legitimate governmental objectives that motivate municipal regulation, we will not hesitate to cautiously depart from traditional rules. (Shenefield, The Parker v.

Brown State Action Doctrine and the New Federalism of Antitrust (1982) 51 Antitrust L.J. 337, 346; Note, The Application of Antitrust Laws to Municipal Activities (1979) 79 Colum.L.Rev. 518, 539-543; Note, Home Rule and the Sherman Act After Boulder: Cities Between a Rock and a Hard Place (1983) 49 Brooklyn L.Rev. 259, 291-297 [hereinafter cited Home Rule]; The Supreme Court, 1981 Term (1982) 96 Harv.L.Rev. 268, 272-276.) b. The Two Traditional Standards: The Rule of Reason, and the Rule of Per Se Illegality Although the prohibition in

section 1 of “[e]very contract, combination ... or conspiracy, in restraint of trade” was at first applied literally to invalidate all such restraints (e.g., United States v.

Trans-Missouri Freight Ass’n (1897) 166 U.S. 290, 328 [41 L.Ed. 1007, 1023, 17 S.Ct. 540] [“the plain and ordinary meaning of . . . [section 1] is not limited to that kind of contract alone which is an unreasonable restraint of trade, but all contracts are included . . .” within the section’s proscription]), the court soon retreated from this manichean view of the Act, holding it was not intended to strike down restraints merely ancillary or incidental to another legitimate purpose. (United States v. Addyston Pipe & Steel Co. (6th Cir. 1898) 85 F. 271, 282, mod. and affd. sub nom. Addyston Pipe & Steel Co. v.

United States (1899) 175 U.S. 211, 244 [44 L.Ed. 136, 148-149, 20 S.Ct. 96].) In Standard Oil Co. v. United States (1911) 221 U.S. 1 [55 L.Ed. 619, 31 S.Ct. 502], the court announced that the Act “evidenced the intent not to restrain the right to make and enforce contracts . . . which did not unduly restrain interstate or foreign commerce, but to protect that commerce from being restrained by methods . . . which would constitute an interference,— that is, an undue restraint.” (Id. at p. 60 [55 L.Ed. at p. 645]; see also United States v.

American Tobacco Co. (1911) 221 U.S. 106, 179 [55 L.Ed. 663, 693-694, 31 S.Ct. 632] [“restraint of trade” covers only those acts that “injuriously restraint] trade”].) Today, under what has become termed the “rule of reason,” many restraints are analyzed in light of their economic effects on market conditions, and may be upheld if “reasonable,” i.e., if the restraint “merely regulates and perhaps thereby promotes competition” instead of suppressing or destroying competition. (Chicago Bd. of Trade v.

United States (1918) 246 U.S. 231, 238 [62 L.Ed. 683, 687, 38 S.Ct. 242].) Some types of restraints, however, were never given such accommodating review. Cartels—agreements among producers to set prices above the competitive level by lowering production—were early declared illegal “per se,” and the courts refused to consider arguments that prices set by a cartel were “reasonable.” (Note, Fixing the Price Fixing Confusion: A Rule of Reason Approach (1983) 92 Yale L.J. 706, 710-712 [hereinafter Price Fixing Confusion].) Whereas these cases focused on cartel behavior (e.g., United States v.

Trenton Potteries Co. (1927) 273 U.S. 392 [71 L.Ed. 700, 47 S.Ct. 377, 50 A.L.R. 989]; see Price Fixing Confusion, supra, at p. 712, fn. 38; Comment, The Per Se Illegality of Price-Fixing—Sans Power, Purpose, or Effect (1952) 19 U.Chi.L.Rev. 837, 855) and refused to consider economic reasonableness on the assumption that cartels were themselves evils to be eradicated (e.g., Bork, supra, 9 J.L. & Econ. at p. 11), the United States Supreme Court in 1940 significantly expanded the universe of price-related agreements subject to an irrebuttable presumption of illegality. In United States v.

Socony-Vacuum Oil Co. (1940) 310 U.S. 150 [84 L.Ed. 1129, 60 S.Ct. 811], the court, through Justice Douglas, inferred the existence of a cartel from the defendants’ agreement to buy surplus oil.

Socony, however, focused on price fixing itself rather than the inferred cartel; the court stated that whether the parties actually could or did succeed in fixing prices was irrelevant, and broadly characterized the proscribed conduct of price fixing: “Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity ... is illegal per se. ...” (Id. at p. 223 [84 L.Ed. at p. 1168].) “[T]he machinery employed ... is immaterial.” (Ibid.) “Any combination which tampers with price structures is engaged in an unlawful activity.” (Id. at p. 221 [84 L.Ed. at p. 1167].) The focus of attention since Socony has been on whether defendants have in any way agreed on a course of conduct affecting prices: if the label “price fixing” is found to fit the conduct in question, the courts have mechanically declared such conduct illegal “even though no invidious purpose or harmful economic consequences have been established, and even though the economic results of the conduct may be of net benefit to consumers.” (Price Fixing Confusion, supra, 92 Yale L.J. at p. 714; see Arizona v.

Maricopa County Medical Soc’y (1982) 457 U.S. 332 [73 L.Ed.2d 48, 102 S.Ct. 2466] [member physicians’ “foundations” to set maximum fees charged to insurance plan patients illegal per se price fixing].) The per se rule reflects an irrebuttable presumption that, if the court were to subject the conduct in question to a full-blown inquiry, a violation would be found under the traditional rule of reason. (Id. at p. 344 [73 L.Ed.2d at pp. 58-59]; Northern Pac. Ry. v.

United States (1958) 356 U.S. 1, 5 [2 L.Ed.2d 545, 549, 78 S.Ct. 514].) Although the price-fixing illegal per se rule has its adherents, and is asserted to be economically reliable and administratively efficient, it has also suffered steady and growing criticism as an often arbitrary, mechanical, and inconsistently applied rule that ignores the realities of market power and net economic effects. Of course, we are not here concerned with the wisdom or efficacy of the per se rule as it applies to price fixing in the typical case against private business defendants.

Nevertheless, we question whether the rule should be extended to cover the municipal defendants in this case. Therefore, although plaintiffs urge us to declare the ordinance facially invalid because it represents blatant, albeit government-imposed, vertical and horizontal fixing of maximum prices, we must first pause to consider whether these municipal defendants should be subject to the per se rule, the rule of reason, or a more accommodating standard. c.

Purpose and Applicability of the Per Se Rule Against Price Fixing Of course, “it is . . . improper to dispose of an antitrust case by invoking a per se rule unless the challenged practice really fits the policy and rationale of the rule.” (Elman, “Petrified Opinions” and Competitive Realities (1966) 66 Colum.L.Rev. 625, 627; cf., Boulder, supra, 455 U.S. 40, 65 [70 L.Ed.2d 810, 827], Rehnquist, J., dis. [questioning whether per se rules of illegality will apply to municipal defendants in the same manner as they apply to private business defendants].) Because we determine below that the two principal justifications for the rule’s application to private business enterprises—economic reliability and ease of administration—are not implicated in the situation before us, we must conclude that the per se rule has no place in this case. (

i) Economic Reliability The per se rule is thought to be economically reliable because, the courts assume, price fixing almost always has anticompetitive effects and almost never has procompetitive effects or “redeeming virtue.” Although it is unquestionable that the United States Supreme Court has long viewed price fixing by private business enterprises as illegal per se (e.g., Monsanto Co. v. Spray-Rite Service Corp. (1984) 465 U.S. 752, 761 [79 L.Ed.2d 775, 783, 104 S.Ct. 1464, 1469]), we note that the court has never addressed the question whether the same rule applies to the same conduct by municipalities.

Moreover, just as the Supreme Court in the past has declined to apply the per se rule in circumstances that pose previously unaddressed questions of economic effect (cf. White Motor Co. v.

United States (1963) 372 U.S. 253, 261 [9 L.Ed.2d 738, 745, 83 S.Ct. 696] [refusing to apply a new per se rule]; but see, Maricopa, supra, 457 U.S. 332, 349 [73 L.Ed.2d 48, 61] [applying an established per se rule to a “new” industry]), we too are reluctant to announce at this early stage, and without the benefit of any evidence regarding the economic consequences of locally imposed rent controls, that price fixing implemented by a local government necessarily produces negative net anticompetitive effects or that it lacks “any redeeming virtue.” (Continental T. V, Inc. v.

GTE Sylvania Inc. (1977) 433 U.S. 36, 50 [53 L.Ed.2d 568, 580, 97 S.Ct. 2549]; see post, pp. 670-671, fn. 20.) The court’s conclusion that price fixing by private business defendants is “invariably anticompetitive,” is based on a fear that even if prices are reasonable when set, by sanctioning such behavior the courts would facilitate fixing of unreasonable prices in the future. (Socony, supra, 310 U.S. 150, 221 [84 L.Ed. 1129, 1167]; Trenton Potteries, supra, 273 U.S. 392, 397 [71 L.Ed. 700, 705].) In the context of price fixing by a cartel, the Trenton Potteries court observed that “[t]he aim and result of every price-fixing agreement, if effective, is the elimination of one form of competition.

The power to fix prices, whether reasonably exercised or not, involves power to control the market and to fix arbitrary and unreasonable prices. The reasonable price fixed today may through economic and business changes become the unreasonable price of tomorrow. Once established, it may be maintained unchanged because of the absence of competition secured by the agreement for a price reasonable when fixed.” (273 U.S. 392, 397 [71 L.Ed. 700, 705].) The Socony court echoed this concern, noting that “'[t]hose who controlled the prices would control or effectively dominate the market.

And those who were in that strategic position would have it in their power to destroy or drastically impair the competitive system.” (310 U.S. 150, 221 [84 L.Ed. 1129, 1167].) The court’s fear of facilitating such “predatory” activity is grounded on assumptions about how unrestrained business competitors will act if given the opportunity. These assumptions have no place in the present case, however. There is nothing to suggest that the named defendants are acting for their own selfish purposes with a view toward securing market control and hence price control in the future.

Quite the contrary, defendants’ sole and only legitimate purpose is to serve the public welfare as described in

section 3 of the ordinance.

When that purpose no longer exists—i.e., when annual average citywide rental vacancies exceed 5 percent over a six-month period—the ordinance provides for lifting of rent controls until the vacancy rate again falls below 5 percent. (§ 6, subd. (q).) We therefore conclude that neither the presumption that price fixing is invariably anticompetitive, nor the fear of facilitating “predatory” practices—both concerns that have been expressed by the United States Supreme Court in the context of analyzing the conduct of private business defendants—justifies application of the per se rule to municipalities acting in their legitimate governmental capacities. (ii) Ease of Administration The per se rule is also said to be justified by its ease of judicial administration.

Both the Trenton Potteries and the Socony courts further explained refusal to inquire into the reasonableness of set prices on the ground that such a review would necessitate constant detailed supervision and analysis by the government to assure that reasonable prices remain reasonable as economic conditions vary. (273 U.S. 392, 397-398 [71 L.Ed. 700, 705-706]; 310 U.S. 150, 221 [84 L.Ed. 1129, 1167].) Recently, the Maricopa court stated that the high costs associated with “elaborate inquiry into . . . reasonableness” was a major justification for analyzing maximum price fixing in the health care industry under the per se rule. (457 U.S. 332, 343-344 [73 L.Ed.2d 48, 57-58].) Certainly, the judicial task is easier when the question is changed from “does the conduct unreasonably restrain competition” to “have defendants engaged in price fixing.” Resort to this rule of administrative convenience, however, can be justified only if the costs “of formulating the rule, and of the overinclusiveness that inevitably accompanies it—are less than the attendant savings in administrative costs.” (Price Fixing Confusion, supra, 92 Yale L.J. at p. 709; see also United States v.

Container Corp. (1969) 393 U.S. 333, 341 [21 L.Ed.2d 526, 532, 89 S.Ct. 510] (Marshall, J., dis.); Ehrlich & Posner, An Economic Analysis of Legal Rulemaking (1974) 3 J. Legal Stud. 257, 264-273; Easterbrook, Maximum Price Fixing, supra, 48 U.Chi.L.Rev. 886, 909-910; Bohling, A Simplified Rule of Reason for Vertical Restraints: Integrating Social Goals, Economic Analysis, and Sylvania (1979) 64 Iowa L.Rev. 461, 490-491.) The potential for overinclusiveness in the present case is apparent.

Whereas the United States Supreme Court in Trenton Potteries and Socony based its refusal to consider whether private business defendants had set reasonable prices largely on the absence of administrative supervision and on the impracticality of constant judicial review of such prices, the present case presents a different situation.

By express provision of the ordinance, it is the Board’s duty constantly to review and, if necessary, to adjust rents in order to assure each landlord a “fair return on his investment.” On the face of the ordinance, rents would “be subject to continuous administrative supervision and readjustment in light of changed conditions” (Socony, supra, 310 U.S. 150, 221 [84 L.Ed. 1129, 1167]) without requiring any involvement by the courts unless a landlord chooses to exercise his right to appeal his individual adjustment.

Moreover, costs of administering the program are borne by the local agency: the ordinance is designed to allow the Board efficiently to address and resolve adjustment disputes and to be financially self-supporting.

We therefore must conclude that application of the “ease of administration” justification for the per se rule would, in the present case, improperly remove from judicial scrutiny an elaborate government-enforced maximum price control and adjustment scheme not contemplated by the court’s previous cases dealing with private business defendants. (See Posner, The Proper Relationship Between State Regulation and the Federal Antitrust Laws (1974) 49 N.Y.U.

L.Rev. 693, 706.) We cannot say that probable economic harm, together with social costs resulting from absence of a per se rule, outweighs the risk of condemning, without any detailed inquiry, a local government’s heretofore presumed legitimate exercise of its police powers. (Cf. Bohling, supra, 64 Iowa L.Rev. at p. 491.) In our view, maximum rents price fixing, implemented by local government, is simply not of the same character as price fixing among private business defendants.

Because we find neither the economic reliability justification nor the ease of administration justification applicable to municipal defendants’ alleged anticompetitive behavior, we decline to subject these defendants to analysis under the per se rule. We turn, instead, to the rule of reason. If this were a typical case in which it was determined that a per se rule did not apply to a claim of facial conflict with the Sherman Act, our inquiry would end here and the parties would be left to litigate their antitrust claims at trial under the rule of reason. (Rice v.

Norman Williams Co., supra, 458 U.S. 654, 661 [73 L.Ed.2d 1042, 1050].) We cannot take that course in this appeal, however, because, as we conclude below, the rule of reason as presently formulated is inapplicable to review of alleged conflict between a municipal regulation and the Sherman Act. d. Applicability of the Rule of Reason In National Soc. of Professional Engineers v. U. S. (1978) 435 U.S. 679 [55 L.Ed.2d 637, 98 S.Ct. 1355] the court held a professional association’s price maintenance scheme illegal per se.

Before reaching that conclusion, however, the court reviewed the defendant’s claim that its conduct was legal under the rule of reason because it was motivated by a desire to forestall decreased quality, and hence public harm, that might result if there was unrestrained competitive bidding among engineers. The court rejected the defendant’s public welfare argument: “[cjontrary to its name, the Rule [of Reason] does not open the field of antitrust inquiry to any argument in favor of a challenged restraint that may fall within the realm of reason.

Instead, it focuses directly on the challenged restraint’s impact on competitive conditions.” (Id. at p. 688 [55 L.Ed.2d at p. 648]; Chicago Bd. of Trade, supra, 246 U.S. 231, 238 [62 L.Ed. 683, 687]; Standard Oil, supra, 221 U.S. 1, 58 [55 L.Ed. 619, 644].) The court made clear that under the rule of reason, inquiry is limited to whether the challenged conduct promotes or suppresses competition. (435 U.S. at p. 691 [55 L.Ed.2d at p. 650].) The parties will not be heard to argue, and a court may not consider, whether a policy favoring competition is in the public interest. (Id. at p. 692 [55 L.Ed.2d at p. 650].) As stated above, however, we will not mechanically apply to municipal defendants rules of law developed exclusively in the context of determining private business antitrust liability.

Whereas private business is motivated chiefly by the goal of increasing profits, the only legitimate purpose for municipal action is promotion of public health, safety and welfare.

If courts were to judge municipal conduct under the rule of reason as it applies to private business enterprises, i.e., solely by the effect of the restraint on competition, most municipal actions would be found to violate the law: “[cjompetition simply does not and cannot further the interests that lie behind most social welfare legislation.” (Boulder, supra, 455 U.S. 40, 66 [70 L.Ed.2d 810, 828], Rehnquist, J., dis.) At the least, such regulations would be declared void; at worst, local governments might be subject to treble damages.

We cannot believe that Congress intended such results to flow from a municipality’s heretofore presumed legitimate exercise of its police power. (Id., at p. 67 [70 L.Ed.2d at p. 829] [“If municipalities are permitted only to enact ordinances that are consistent with the procompetitive policies of the Sherman Act, a municipality’s power to regulate the economy would be all but destroyed.”]; Vanderstar, supra, 32 Cath.U.L.Rev. at pp. 397-400; Handler, The Current Attack on the Parker v.

Brown State Action Doctrine (1976) 76 Colum.L.Rev. 1, 15; Hovenkamp, Tying Arrangements in the Real Estate Market: Federal Antitrust Law and Local Land Development Policy (1981) 33 Hastings L.J. 325, 335.) To prevent unwarranted interference with a municipal government’s legitimate exercise of its police power, and to accommodate the motives that underlie local government regulation (cf. e.g., Elzinga, The Goals of Antitrust Law: Other Than Competition and Efficiency, What Else Counts? (1977) 125 U.Pa.L.Rev. 1191), courts must develop tests that recognize a public welfare “defense” to alleged violation of the antitrust laws by municipalities. (Boulder, supra, 455 U.S. at pp. 66-67 [70 L.Ed.2d at pp. 828-829], Rehnquist, J., dis.; Home Rule, supra, 49 Brooklyn L.Rev. at pp. 294-295; Note, The Application of Antitrust Laws to Municipal Activities (1979) 79 Colum.L.Rev. 518, 539-543; The Supreme Court, 1981 Term (1982) 96 Harv.L.Rev. 62, 268, 275.) e.

Facial Validity of the Ordinance Under a Modified Standard We do not mean to suggest that rejection of the traditional rule of reason test in this case harkens return to “the same wide-ranging, essentially standardless inquiry into the reasonableness of local regulation” reminiscent of Lochner v.

New York (1905) 198 U.S. 45 [49 L.Ed. 937, 25 S.Ct. 539], (Boulder, supra, 455 U.S. at p. 67 [70 L.Ed.2d at p. 829], Rehnquist, J., dis.) Whereas the primary evil of the Lochner approach was an overly strict emphasis on the ends-means nexus that in turn allowed judges wide latitude to impose their own standards of reasonableness on economic and social legislation, such jurisprudence has no place in our analysis of a municipal regulation’s potential conflict with the antitrust laws.

In articulating an appropriate test by which to review municipal actions alleged to conflict with the federal antitrust laws, we seek on the one hand a test that is sufficiently flexible to accommodate the interest of local government in promoting public health, safety and welfare programs or regulations. At the same time, we favor a standard that is not toothless; mere incantation of a purpose to promote the public welfare should not insulate municipal regulations from invalidation under the supremacy clause.

Local governments should not be judged under a standard that will guarantee validity even for improperly motivated or implemented anticompetitive municipal regulations or commercial enterprises that plainly undermine the objectives of the federal antitrust laws. We turn for initial guidance to the United States Supreme Court’s commerce clause cases. State or local regulation will be upheld against commerce clause attack if the regulation (1) does not discriminate against interstate commerce and (2) bears a rational relationship to a legitimate local purpose.

In addition, the extent to which the court will permit burdens on interstate commerce depends on (3) the nature of the local interest, and whether it could be promoted with a lesser impact on interstate activities. Once these elements are satisfied, the court applies a balancing test: a regulation will be upheld unless its incidental burdens on interstate commerce are clearly excessive in relation to the putative local benefits. (E.g., Edgar v. MITE Corp. (1982) 457 U.S. 624, 643-646 [73 L.Ed.2d 269, 283-285, 102 S.Ct. 2629] [striking down state business takeover act]; Kassel v.

Consolidated Freightways Corp. (1981) 450 U.S. 662, 671-679 [67 L.Ed.2d 580, 587-592, 101 S.Ct. 1309] [striking down state truck length statute]; Minnesota v. Clover Leaf Creamery Co. (1981) 449 U.S. 456, 471-474 [66 L.Ed.2d 659, 673-675, 101 S.Ct. 715] [upholding state law banning plastic and nonreturnable milk containers]; Hughes v. Oklahoma (1979) 441 U.S. 322, 336-338 [60 L.Ed.2d 250, 261-263, 99 S.Ct. 1727] [striking down state regulation of minnow trade]; Pike v.

Bruce Church, Inc. (1970) 397 U.S. 137, 142 [25 L.Ed.2d 174, 178, 90 S.Ct. 844] [striking down state law on packaging of cantalopes]; Dean Milk Co. v. Madison (1951) 340 U.S. 349, 353-356 [95 L.Ed. 329, 332-334, 71 S.Ct. 295] [striking down local milk regulation].) With appropriate modifications, we believe that a test modeled after the court’s commerce clause cases will provide a workable standard for judging alleged conflict between municipal ordinances and the federal antitrust laws. We will, however, depart from the United States Supreme Court’s commerce clause test in one significant respect.

We will not apply the wide-ranging, essentially standardless cost-benefit analysis employed in the court’s recent “balancing” decisions. (See, e.g., MITE Corp., supra, 457 U.S. 624 [73 L.Ed.2d 269]; Kassel, supra, 450 U.S. 662 [67 L.Ed.2d 580]; Clover Leaf Creamery, supra, 449 U.S. 456 [66 L.Ed.2d 659]; see generally, Eule, Laying the Dormant Commerce Clause to Rest (1982) 91 Yale L.J. 425 [criticizing the court’s balancing approach, and proposing an alternate standard]; Maltz, How Much Regulation is too Much—An Examination of Commerce Clause Jurisprudence (1981) 50 Geo.Wash.L.Rev. 47 [same]; Tushnet, Rethinking the Dormant Commerce Clause 1979 Wis.L.Rev. 125 [same].) Balancing a municipality’s need for particular local health, safety and welfare regulations or programs against often incommensurable alleged anticompetitive effects is a task for which courts are not well suited.

On the other hand, a standard applicable to municipalities must be capable of considering those economic efficiency factors that underlie federal antitrust policy. Adapting the court’s commerce clause test to this facial

section 1 attack on a municipal rent control ordinance, we conclude that if a municipal regulation has a proper local purpose, is rationally related to the municipality’s legitimate exercise of its police power, and operates in an even handed manner, it must be upheld against a claim that it conflicts with

section 1 of the Sherman Act unless the plaintiff demonstrates that the city’s purposes could be achieved as effectively by means that would have a less intrusive impact on federal antitrust policies. Applying this test to the present case, we first observe that our decision in Birkenfeld forecloses any suggestion that the regulation is not supported by a legitimate purpose. There are no allegations of conflict of interest or illegal collusion in the enactment or drafting of the ordinance.

Moreover, “[i]t has long been settled that [municipal police] power extends to objectives in furtherance of the public peace, safety, morals, health and welfare and ‘is not a circumscribed prerogative, but is elastic and, in keeping with the growth of knowledge and the belief in the popular mind of the need for its application, capable of expansion to meet existing conditions of modern life.’ ” (17 Cal.3d 129, 160.) Nor can it be suggested at this late date that rent control is not rationally related to the municipality’s legitimate exercise of its police power.

We observed in Birkenfeld that, as in the present case, “[t]he charter amendment includes in its stated purposes for imposing rent control the alleviation of the ill effects of the exploitation of a housing shortage by the charging of exorbitant rents to the detriment of the public health and welfare of the city and particularly its underprivileged groups. [Citation.] The amendment thus states on its face the existence of conditions in the city under which residential rent controls are reasonably related to promotion of the public health and welfare and are therefore within the police power.” {Ibid.) Furthermore, Birkenfeld very clearly establishes that, even absent a so-called “housing emergency,” local regulation of rents for the purposes stated in

section 3 of the present ordinance is a rational exercise of the municipality’s police power. (Id. at pp. 153-164; Carson Mobilehome Park Owners’ Assn. v. City of Carson (1983) 35 Cal.3d 184, 189, fn. 4 [197 Cal.Rptr. 284, 672 P.2d 1297].) Neither can plaintiffs demonstrate that the regulation fails to operate in an even handed manner. The only possible theory of discriminatory treatment of similarly situated landlords concerns

section 5, subdivision (f), of the ordinance.

When the regulation was passed, this provision exempted “[r]ental units in a residential property which is divided into a maximum of four (4) units where one of such units is occupied by the landlord as his/ her principal residence,” but limited the exemption to “rental units that would have been exempt under the provisions of this Ordinance had this Ordinance been in effect on December 31, 1979.” Plaintiffs do not challenge the exemption itself; instead, they challenge subdivision (f), to the extent that it excludes from the exemption any property that became owner-occupied after December 31, 1979.

As defendants point out, however, the challenged exclusion from the exemption bears a debatable rational relationship to the purposes of the ordinance.

The Berkeley electorate could reasonably have determined that the exclusion was desirable to prevent some landlords from avoiding application of the ordinance by evicting tenants and moving into their rental property after the provisions of the proposed ordinance became known. (See Baar, Guidelines for Drafting Rent Control Laws: Lessons of a Decade (1983) 35 Rutgers L.Rev. 723, 758 & fn. 128 [suggesting that in jurisdictions without the exemption limitation, such abuse is widespread].) Because the disparate treatment afforded similarly situated landlords is supported by a debatable rational basis, this aspect of plaintiffs’ challenge must also be rejected. (Clover Leaf Creamery, supra, 449 U.S. 456, 464 [66 L.Ed.2d 659, 668]; New Orleans v.

Dukes (1976) 427 U.S. 297, 303 [49 L.Ed.2d 511, 516, 96 S.Ct. 2513]; Hale v. Morgan (1978) 22 Cal.3d 388, 395 [149 Cal.Rptr. 375, 584 P.2d 512].) Finally, plaintiffs suggest no alternative, equally effective approach to achieving defendants’ legitimate local purposes by means that would have a less intrusive impact on federal antitrust policies. Indeed, such a showing could be made only after extensive evidence has been taken in the trial court. We therefore hold that plaintiffs have failed to establish that the ordinance on its face conflicts with

section 1 of the Sherman Act. C. Facial Validity of the Ordinance Under

Section 2 of the Sherman Act Plaintiffs also assert that the ordinance on its face violates

section 2 of the Act. That

section provides inter alia that “[e]very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States . . . shall be deemed guilty of a felony . . . .” (15 U.S.C. § 2.) In the context of reviewing the legality of private business conduct, the United States Supreme Court has established that the “offense” of monopolization consists of two elements: (1) possession of “monopoly power” in the relevant market, and (2) willful acquisition of that power. (United States v.

Grinnell Corp. (1966) 384 U.S. 563, 570-571 [16 L.Ed.2d 778, 785-786, 86 S.Ct. 1698].) “Monopoly power” has been defined as the “power to control prices or exclude competition.” (United States v. du Pont Co. (1956) 351 U.S. 377, 391 & fn. 18 [100 L.Ed. 1264, 1278-1279, 76 S.Ct. 994].) The existence of such power may be inferred from a defendant’s predominant share of the relevant market. (Grinnell, supra, 384 U.S. at p. 571 [16 L.Ed.2d at p. 786] [87 percent of market is monopoly power]; American Tobacco Co. v.

United States (1946) 328 U.S. 781, 797 [90 L.Ed. 1575, 1587, 66 S.Ct. 1125] [two-thirds to 80 percent of market is monopoly power].) Seizing on these principles, plaintiffs claim the ordinance is “obviously” invalid because it represents a willful acquisition of power to control prices of all covered rental units in Berkeley—23,000 of the 27,000 units in that city.

Although plaintiffs’ claim would likely have merit if defendants were private business parties and if the restraint was proved to affect interstate commerce, for reasons discussed above we will not mechanically apply to municipal defendants, rules of law fashioned exclusively in the context of private business regulation. Instead, and assuming, over defendants’ vehement protestations, that

section 2 of the Act applies to a party that is not itself a competitor in the relevant market that it is accused of monopolizing, we apply the test articulated ante, at page 675. As explained previously, the stated objectives of the ordinance indicate a legitimate local purpose.

Plaintiffs do not contend that the ordinance was implemented through misconduct, conflict of interest, or in order to affect discrimination—all factors that would tend to rebut defendants’ claim of a legitimate purpose. (See Cirace, supra, 61 Tex.L.Rev. at p. 498.) It is established that the means invoked by defendants’ ordinance is a rational exercise of the municipality’s police power. Plaintiffs have cited no evidence tending to show that the ordinance fails to regulate similarly situated competitors in a reasonably evenhanded manner.

Finally, they suggest no equally effective alternative to accomplish these legitimate local purposes by means that would have a less intrusive impact on federal antitrust policies. We therefore conclude that plaintiffs have failed to establish that the ordinance on its face conflicts with

section 2 of the Sherman Act. Because we determine that plaintiffs have not established a conflict with the Act, we do not address whether the ordinance may be exempt from antitrust scrutiny under Boulder. (Rice v. Norman Williams Co., supra, 458 U.S. at p. 662, fn. 9 [73 L.Ed.2d at p. 1042].) We proceed to analyze plaintiffs’ additional constitutional and statutory contentions. II. Rent Control Issues A.

Facial Validity of the Ordinance’s “Fair Return” Standard The primary dispute in the trial court and one of the primary substantive questions posed on this appeal concerns whether a rent control ordinance is facially constitutional if it provides that a landlord is to receive a fair return on his investment rather than a fair return on the value of his property. The parties, assisted by amici curiae on both sides of the issue, have vigorously briefed and argued their respective views. We must stress at the outset, however, the limited scope of our inquiry in facial challenges such as this.

As we made clear in Birkenfeld, whether rental regulations are fair or confiscatory depends ultimately on the result reached. (17 Cal.3d 129, 165.) That determination, of course, can only be made by analyzing a challenge to the regulation as applied. Nevertheless, we will declare a regulation invalid on its face “when its terms will not permit those who administer it to avoid confiscatory results in its application to the complaining parties.” (Id. at p. 165; see also Cotati Alliance for Better Housing v. City of Cotati (1983) 148 Cal.App.3d 280, 287, 291 [195 Cal.Rptr. 825]; Hutton Park Gardens v.

Town Council (1975) 68 N.J. 543 [350 A.2d 1, 14-16].) For more than a decade, rent control agencies throughout this state and the nation have employed a veritable smorgasbord of administrative standards by which to determine rent ceilings. (Carson, supra, 35 Cal.3d 184, 188 [“just, fair and reasonable”]; Cotati Alliance, supra, 148 Cal.App.3d at p. 286 [“fair and reasonable return on investment”]; Palos Verdes Shores Mobile Estates, Ltd. v. City of Los Angeles (1983) 142 Cal.App.3d 362, 371 [190 Cal.Rptr. 866] [“just and reasonable return” based on the “maintenance of profit” approach]; Gregory v.

City of San Juan Capistrano (1983) 142 Cal.App.3d 72, 86 [191 Cal.Rptr. 47] [interpreting “return on investment” as requiring a “just and reasonable return on the fair market value of [landlords’] property”]; see also Baar, Guidelines for Drafting Rent Control Laws: Lessons of a Decade (1983) 35 Rutgers L.Rev. 723, 781-817 [describing and analyzing the following standards: (1) cash flow/return on gross rent; (2) return on equity (investment); (3) return on value; (4) percentage net operating income; and (5) maintenance of net operating income] ; Comment, Rethinking Rent Control: An Analysis of “Fair Return” (1981) 12 Rutgers L.J. 617, 640-648 [hereinafter cited Fair Return]; Comment, Rent Control and Landlords’ Property Rights: The Reasonable Return Doctrine Revived (1980) 33 Rutgers L.Rev. 165 [hereinafter cited Reasonable Return Doctriné].) As we recently stressed in Carson, “[r]ent control agencies are not obliged by either the state or federal Constitution to fix rents by application of any particular method or formula.” (35 Cal.3d at p. 191, citing Power Comm’n v.

Pipeline Co. (1942) 315 U.S. 575, 586 [86 L.Ed. 1037, 1049-1050, 62 S.Ct. 736]; Power Comm’n v. Hope Gas Co. (1944) 320 U.S. 591, 601-602 [88 L.Ed. 333, 344, 64 S.Ct. 281].) In view of this oft-quoted and oft-followed principle, we are not persuaded by plaintiffs’ and amici’s apparent contention that the much criticized return on value standard—or any of its variations—is required to be employed by the Board in the present case. We reiterate that selection of an administrative standard by which to set rent ceilings is a task for local governments—in this case the voters themselves— and not the courts.

Our only concern in this appeal is whether defendants’ fair return on investment standard, on its face, will not permit those who administer it to avoid confiscatory results. (Birkenfeld, supra, 17 Cal.3d at p. 165; Power Comm’n v.

Pipeline Co., supra, 315 U.S. at pp. 585-586 [86 L.Ed. at pp. 1049-1050]; Hutton Park, supra, 350 A.2d at pp. 13-16.) If we conclude that the fair return on investment standard affords the Board sufficient flexibility to avoid confiscatory results, we must uphold the ordinance. (Cotati Alliance, supra, 148 Cal.App.3d at pp. 289-291.) Plaintiffs and amici posit a number of due process obstacles and practical difficulties that the Board may face in administering the return on investment standard, but none will prevent the Board from avoiding confiscatory results. 1.

Adjustment of Landlords’ Frozen May 1980 Profit Amount, and Consideration of the Effect of Inflation One of plaintiffs’ primary complaints is that

section 11 of the ordinance locks landlords into the fixed dollar amount of profit they earned in May 1980, and that in order for the Board to avoid confining those landlords who invested long ago with preinflation dollars to their May 1980 profit amount, it must be free under

section 12 of the ordinance to take into consideration the effect of inflation on individual landlords’ investments and award fair returns based on “adjusted” investment figures. Clearly, if the fixed amount of a landlord’s profit remains the same year after year his return will in time diminish in real value: it is obvious that a $1,000 “profit” in 1990 will have a much lower value than the same dollar amount of profit in 1980.

Furthermore, although a fixed profit amount may produce a reasonable or fair return on investment for low-risk investments such as bonds, we must agree with plaintiffs that investment in rental units contemplates a higher risk and hence, in times of high inflation and when viewed in the long term, demands more than mere maintenance of an existing profit amount. (Cotati Alliance, supra, 148 Cal.App.3d at p. 295; Hutton Park Gardens v.

Town Council, supra, 350 A.2d 1, 15 [a just and reasonable return on investment is one that is generally commensurate with returns on investments in other enterprises having comparable risks].) Therefore, although defendants’ ordinance may properly restrict landlords’ profits on their rental investments, it may not indefinitely freeze the dollar amount of those profits without eventually causing confiscatory results. (Cotati Alliance, supra, at p. 293 [“If the net operating profit of a landlord continues to be the identical number of dollars, there is in time a real diminution to the landlord which eventually becomes confiscatory.”].) In determining the facial validity of the ordinance against plaintiffs’ claim that it must be interpreted to require the Board to account for the effect of inflation on investment in determining a landlord’s amount of profit or return, we adhere to the rule earlier stressed, that whether a regulation produces a return that is confiscatory or fair depends ultimately on the result, and that we will invalidate an ordinance on its face only if its terms preclude avoidance of confiscatory results.

First, it is not apparent that the ordinance on its face precludes alternative means of adjusting landlords’ frozen May 1980 profit amounts. Moreover, even assuming arguendo that a confiscatory result might occur in a future individual case if the Board fails to invoke measures necessary to adjust the dollar amount of a landlord’s May 1980 profit, this would still provide us no basis on which to invalidate the entire ordinance, or its administrative “fair return on investment” standard.

Unlike Birkenfeld, in which we determined that inherent and unnecessary procedural defects inevitably deprived all landlords of due process “except perhaps for a lucky few” (17 Cal.3d at p. 172), in this case, by contrast, it is unknown what percentage of landlords might be able to prove unconstitutional confiscation if the Board fails to consider the effect of inflation on dollars invested in order to adjust a landlord’s frozen profit amount.

Nor do we have before us any evidence to suggest that when faced with such a prospect, the Board will decline to invoke measures within its powers to adjust individual profit amounts. In this regard we observe that “[i]t is tó be presumed that the board will exercise its powers in conformity with the requirements of the Constitution; and if it does act unfairly, the fault lies with the board and not the statute.” (Butterworth v.

Boyd (1938) 12 Cal.2d 140, 149 [82 P.2d 434, 126 A.L.R. 838].) Until we are required to review a specific challenge to the Board’s application of the ordinance, we note simply that, as defendants themselves concede {ante, p. 682, fn. 37), the ordinance is not drawn so narrowly as to preclude consideration of the effect of inflation on a landlord’s investment in those cases in which the Board might deem it necessary to take that factor into account in order to avoid causing a confiscatory result. 2.

Irrational Discrimination Plaintiffs also argue that the investment standard denies equal protection because it will result in different rent ceilings for comparably valued rental units.

This issue was raised and properly decided in Cotati Alliance, in which the court observed that such disparate treatment bears a debatable rational relationship to a legitimate public purpose: the voters could have reasonably concluded that the investment standard, more effectively than a value-based standard, ensures noninflated, reasonable rents for citizens in times of high inflation. (Cotati Alliance, supra, 148 Cal.App.3d 280, 292; see Hale v. Morgan (1978) 22 Cal.3d 388, 395 [149 Cal.Rptr. 375, 584 P.2d 512].) 3.

Ascertaining the Extent of a Landlord’s “Investment” Plaintiffs next predict problems applying the investment standard to landlords who, for various reasons, have made little or no cash investment. However, those who purchased with no down payment, improved property years ago with “preinflation dollars,” or who obtained property through gift or inheritance, need not be deprived of a fair return simply because they made no initial monetary investment. The ordinance does not confine “investment” to such a restrictive definition.

The Board, therefore, is not precluded, in appropriate cases, from considering as “investment,” a landlord’s personal labor in improving his property. (Cotati Alliance, supra, 148 Cal.App.3d at pp. 287, 289.) Nor is the Board precluded from imputing the transferor’s “investment,” adjusted as might be necessary, to landlords who obtained property by gift or inheritance. (Ibid.; Fair Return, supra, 12 Rutgers L.J. at p. 645.) Furthermore, the ordinance does not preclude the Board from considering “forms of investment such as mortgage payments toward principal, [or] cash invested in later improvements in the property” (Cotati Alliance, 148 Cal.App.3d at p. 287), or, with certain exceptions, the terms of a landlord’s individual financing obligations.

In fact, the ordinance directly provides for such flexible application of the investment standard. Subdivision (

i) of

section 12 provides that “[n]o provision of this Ordinance shall be applied so as to prohibit the Board from granting an individual rent adjustment that is demonstrated necessary by the landlord to provide the landlord with a fair return on investment.” 4. Deprivation of Full Long-term Appreciation Finally, amicus for plaintiffs appears to argue that the ordinance’s investment standard is unconstitutional on its face because it unfairly deprives landlords of full long-term appreciation on the value of their regulated property.

The thrust of this contention is apparently aimed at establishing that, as a matter of due process, rent control ordinances must guarantee all landlords a fair return on the full market value of their property.

This issue was also raised in Cotati Alliance, in which the court observed that “[s]ome lessening of appreciation is a necessary consequence of any rent control, since future appreciation is to a significant extent a function of increased rental income. [Citation.] It is one of the very sources of long-term appreciation—inflated rents—that rent control measures are intended to restrict.” (148 Cal.App.3d at p. 290.) The fallacy of plaintiffs’ contention is readily apparent.

Any price-setting regulation, like most other police power regulations of property rights, has the inevitable effect of reducing the value of regulated properties. But it has long been held that such reduction in property value does not by itself render a regulation unconstitutional. Police power legislation results in a confiscatory “taking” only when the owner has been deprived of substantially all reasonable use of the property. (Agins v.

City of Tiburon (1979) 24 Cal.3d 266, 277 [157 Cal.Rptr. 372, 598 P.2d 25], affd. (1980) 447 U.S. 255 [65 L.Ed.2d 106, 100 S.Ct. 2138].) Even a significant diminution in value is insufficient to establish a confiscatory taking. (Euclid v. Ambler Realty Co. (1926) 272 U.S. 365 [71 L.Ed. 303, 47 S.Ct. 114, 54 A.L.R. 1016] [75 percent reduction in value because of zoning law insufficient to establish a taking]; Hadacheck v.

Sebastian (1915) 239 U.S. 394 [60 L.Ed. 348, 36 S.Ct. 143] [nearly 90 percent reduction in value because of use restriction insufficient to establish a taking].) As the United States Supreme Court noted in Hope Gas Co., supra, 320 U.S. at page 601 [88 L.Ed. at page 344], “[t]he fixing of prices, like other applications of the police power, may reduce the value of the property which is being regulated. But the fact that the value is reduced does not mean that the regulation is invalid.” (Accord, Penn. Central Transp. Co. v.

New York City (1978) 438 U.S. 104, 131 [57 L.Ed.2d 631, 652, 98 S.Ct. 2646] [diminution in property value, standing alone, cannot establish a “taking”]; Permian Basin Area Rate Cases (1968) 390 U.S. 747, 769 [20 L.Ed.2d 312, 337, 88 S.Ct. 1344] [“No constitutional objection arises from the imposition of maximum prices merely because ... the value of regulated property is reduced as a consequence of regulation.”].) Thus, although we need not articulate in this facial attack the precise constitutional standard that all administrative rent control standards must meet (ante, p. 681, fn. 35), we can state with certainty that a rent control ordinance need not provide for a fair return on the value of a landlord’s property in order to survive a facial challenge.

We conclude that defendants’ fair return on investment standard will not preclude the Board from avoiding confiscatory results, and hence the administrative standard established in the ordinance is constitutionally valid on its face. (Cal. Const., art. I, § 7; accord, Oceanside Mobilehome Park Owners’ Assn. v. City of Oceanside (1984) 157 Cal.App.3d 887, 897-900 [204 Cal.Rptr. 239]; Cotati Alliance, supra, 148 Cal.App.3d at pp. 288-289, and cases and authorities cited.) B.

Facial Validity of the Ordinance’s Rent Adjustment Procedures As we observed recently in Carson, “[when] rent ceilings of an indefinite duration are established, a mechanism must be provided for granting those increases necessary to permit landlords a just and reasonable return. ‘The mechanism is sufficient for the required purpose only if it is capable of providing adjustments in maximum rents without a substantially greater incidence and degree of delay than is practically necessary.’ ” (35 Cal.3d at p. 191, quoting Birkenfeld, supra, 17 Cal.3d at p. 169.) As plaintiffs observe, “[pjroperty may be as effectively taken by long-continued and unreasonable delay in putting an end to confiscatory rates as by an express affirmance of them . . . .” (Smith v.

Illinois Bell Tel. Co. (1926) 270 U.S. 587, 591 [70 L.Ed. 747, 749, 46 S.Ct. 408].) Of course, some delays are inherent in any rent control scheme. But, “only those delays which are longer than practically necessary to achieve the legitimate purposes of the legislation are constitutionally proscribed.” (Carson, supra, 35 Cal.3d at p. 192; Birkenfeld, supra, 17 Cal.3d at pp. 169, 173.) The test used to review the facial validity of defendants’ adjustment procedures is the same one used above to review the ordinances’ administrative standard for individual maximum rent adjustments under

section 12. We will declare the adjustment procedures invalid only if the ordinance on its face will not permit the Board to avoid confiscatory results. Although in Birkenfeld we found Berkeley’s former ordinance facially unconstitutional on this basis because, by its terms, it precluded reasonably prompt action in most cases, the ordinance before us now contains none of the problems found in the former regulation.

The prior ordinance had no provision for “general rental adjustments for all or any class of rental units based on generally applicable factors such as property taxes.” (Birkenfeld, 17 Cal.3d at p. 171.) Although we recently recognized in Carson that a rent control ordinance need not have a general adjustment provision to pass constitutional muster (35 Cal.3d at p. 194), such a mechanism will be required when the “magnitude of the job to be done” (Birkenfeld, at p. 169) so demands. Since we decided Birkenfeld the number of rental units in Berkeley subject to rent control has increased to 23,000.

However, the exact mechanism found wanting in 1976 is present in the ordinance before us now in

section 11—a comprehensive scheme that provides for annual across the board adjustment based on “cost” factors. The adjustment for all landlords under

section 11 is designed to allow landlords to retain the generally same dollar amount of profit in subsequent years that they received in May 1980. In order to acquire rent increases that reflect cost increases not imposed on other landlords generally, or in order to seek an increase in dollar amount of return (i.e., the dollar amount of profit), a landlord must secure an individual adjustment pursuant to

section 12, subdivision c. And, as observed ante at pages 682-684, unless landlords have reasonab

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