California sued Amazon.com Inc. on Wednesday, the state attorney general said, alleging the online retail giant’s contracts with third-party sellers and wholesalers inflate prices, stifle competition and violate the state’s antitrust and unfair competition laws.

Attorney General Rob Bonta said his office had filed a lawsuit in San Francisco Superior Court seeking to halt Amazon policies he said prevent merchants from offering lower prices through competitors’ websites. The suit is the result of an investigation that began in early 2020, Mr. Bonta said.

The suit asks the court to block Amazon from continuing those policies and to appoint a monitor to ensure the company’s compliance, according to a copy viewed by The Wall Street Journal. It also seeks unspecified damages for harm to the state economy and $2,500 for each violation of the state’s civil and professional code proved at trial.

Amazon warehouse

A truck arrives at the Amazon warehouse facility on the Staten Island borough of New York, April 1, 2022. Amazon is barring off-duty warehouse workers from the company’s facilities, a move organizers say can hamper union drives. (AP Photo/Eduardo Mun (AP Photo/Eduardo Munoz Alvarez, File / Associated Press)

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The lawsuit represents the biggest legal challenge to date in the U.S. for Amazon, which was previously sued by the District of Columbia and is being investigated by the Federal Trade Commission, the European Union and a congressional committee.

Because California is the nation’s most populous state and biggest economy, its business regulations have long swayed how companies operate across the country.

Third-party merchants that offer their products on Amazon’s marketplace make up the majority of the company’s product sales, according to the complaint. California alleges that Amazon requires them to sign agreements that penalize them for offering their products at cheaper prices on competing sites such as Walmart or Target. Those who don’t comply may get pushed lower in Amazon’s search results or be disqualified from being featured in the site’s "buy box," the suit alleges, and may even be suspended or removed.

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According to the complaint, Amazon also forces wholesalers into agreements that penalize them if Amazon lowers its prices to match those of competitors and its profit margin falls below a specified minimum. In some cases, the complaint says, Amazon demands that wholesalers compensate it if competing retailers lower prices on their products.

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The company’s dominance in the online retail space leaves third-party sellers and wholesalers with little choice but to agree, the suit alleges. According to Mr. Bonta, a Democrat, Amazon has engaged in illegal practices since at least 2012.

The complaint says that Amazon previously misled investigators about its practices around pricing, claiming that it had changed its behavior, but then engaging in different conduct with the same purpose and effect.

California Attorney General Rob Bonta speaks on Dec. 17, 2021, at a news conference in Dublin, Calif. (Ray Chavez/Bay Area News Group via AP, File)

"Amazon has stifled its competition for years not by successfully competing, but by blocking competition on price. As a result, California families paid more," Mr. Bonta said at a press conference Wednesday. "With today’s lawsuit, we are sending a message not only to Amazon, but to every corporation in the country."

A spokeswoman for Amazon didn’t respond to a request for comment.

In response to a similar lawsuit filed by D.C’s attorney general last year, Amazon said its policy on merchants that work with other sites is designed to protect consumers from being overcharged. The company has said it decides which third-party merchants to feature based on price, delivery speed and other factors.

DC AG Karl Racine

D.C. Attorney General Karl Racine speaks during a news conference outside the U.S. Capitol on Tuesday, Dec. 14, 2021 (Photo by Bill Clark/CQ-Roll Call, Inc via Getty Images / Getty Images)

The D.C. lawsuit didn’t address Amazon’s relationship with wholesalers.

In March, that suit was tossed out by a Superior Court judge in the District of Columbia based on Amazon’s motion to dismiss. The D.C. attorney general filed a notice of appeal last month.

Mr. Bonta said he was confident his case would succeed where D.C.’s hasn’t, despite similarities in their allegations.

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"For one, we are bringing this lawsuit in California court under California law," he said. "We wouldn’t bring this case unless we were confident in its likelihood of success on the merits."

He said his office discussed the investigation with Amazon representatives in recent days, but hasn’t deposed company executives.

Health and Human Services Secretary Xavier Becerra speaks during a news conference June 28, 2022, in Washington. Aug. 2, 2022. (AP Photo/Patrick Semansky, File) ((AP Photo/Patrick Semansky, File) / AP Newsroom)

In 2020, The Wall Street Journal reported that California had begun an investigation into the way Amazon treats its third-party sellers. The investigation was opened under then-Attorney General Xavier Becerra, who is now the U.S. secretary of health and human services.

Last year, the Journal reported that Connecticut was investigating how Amazon sells and distributes digital books. The Federal Trade Commission is also investigating Amazon’s business practices.

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Earlier this year, Democratic and Republican members of the House Judiciary Committee sent a letter to Attorney General Merrick Garland recommending the Justice Department investigate Amazon and some of its executives for what they said was possible criminal obstruction of Congress related to a separate investigation into Amazon and other big tech companies.

Merrick Garland, U.S. attorney general, speaks during the U.S. Conference of Mayors winter meeting in Washington, D.C., U.S., on Friday, Jan. 21, 2022. (Photographer: Eric Lee/Bloomberg via Getty Images / Getty Images)

Mr. Bonta declined to say whether he had discussed California’s case with the FTC or attorneys general in other states.

In 2020, the European Commission—the European bloc’s top antitrust enforcer—charged Amazon with violating competition law. Part of the charges centered on how Amazon uses nonpublic data from sellers on its website to unfairly compete against them.

Ursula Von Der Leyen

Ursula von der Leyen President of the European Commission held a press conference with Charles Michel President of the European Council while answering questions to the media, after the special EU summit on May 31, 2022. (Photo by Nicolas Economou/Nu (Photo by Nicolas Economou/NurPhoto via Getty Images / Getty Images)

In a settlement proposed in July, Amazon said it would stop using third-party seller data that isn’t public to compete against merchants on its European sites for a period of five years. The company also promised to apply equal treatment to all sellers when deciding what to feature in its "buy box" after being accused of giving priority to those that pay for Amazon’s logistics services.

That settlement proposal is pending approval by regulators at the European Commission.

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