REBUILD THE INDIRECT PURCHASER RULE OF U.S. ANTITRUST LAW

LIU Fei

(School of Management, Shaanxi University of Science & Technolotgy, Xi′an 710021, China)

1 Rebuild the Indirect Purchaser Rule of U.S. Antitrust Law

In June 1977, the United States Supreme Court decided Illinois Brick Co. v. Illinois, held that indirect purchasers are not “injured” within the meaning of § 4 of the Clayton Act in price-fixing cases and are not allowed to sue for antitrust injury under the federal statute. The so-called direct purchaser rule of Illinois Brick was clear and unequivocal, yet, after over four decades, the decision remains controversial. At the same time, many such indirect purchasers have been authorized to seek relief barred in federal court under analogous but more expansive state antitrust law. The Supreme Court specifically endorsed the dual-remedial system in California v. ARC America Corp. , in which it rejected the arguments that Illinois Brick effectively preempted states antitrust remedies. The EU, however, adopted a different approach with Illinois Brick in the US. Considering the feverous criticism about the current US scheme, EU′s approach seems to be a favorable way.

2 Indirect Purchaser Rule of US

The indirect purchaser rule was established in the case of Illinois Brick, which deal with the problems associated with a multiparty supply chain for antitrust claims. Illinois Brick addressed the question of whether a plaintiff down the distribution line could claim that overcharges had been passed-on to the plaintiff, and the court held that indirect purchaser of goods and services form firms engaged in price fixing may not pursue antitrust actions for damages against those firms engaged in the price fixing. This case is critical to understanding how a rigid bar on indirect purchaser claims came about and why it has generated such a feverous debate concerning the rule.

2.1 Illinois Brick

In this case, the State of Illinois brought up the treble-damages action under §4 of the Clayton Act, alleging that it had made purchases from contractors who were customers of price-fixing manufacturers of concrete blocks. The court once again faced the question whether the overcharged direct purchaser should be deemed for purpose of §4 to have suffered the full injury from the overcharge, in a different context in which the indirect purchaser sought to recover the loss. A previous case Hanover Shoe has declined the defensive use of pass-on defense; the issue of Illinois Brick was whether the pass-on defense may be used offensively by an indirect purchaser plaintiff against an alleged violator.

The court adopted a rule of symmetry regarding the offensive use of pass-on, thereby denied the standing to the indirect purchasers barring them from maintaining treble damages actions. The majority took two steps reaching the conclusion. First, it concluded that whatever rule to be adapted to defendants must apply equally to plaintiffs. Indirect purchasers may not recover the overcharge whenever the antitrust defendant would be precluded from asserting the pass-on defense against a direct purchaser. Second, it reaffirmed the construction that the overcharged direct purchaser, and not others in the chain of manufacture or distribution, is the party injured in his business or property within the meaning of §4 of Clayton Act.

The Court emphasized the danger of potential complexity in calculating pass-on damages and reasoned that whole new dimensions of complexity would be added to treble-damages suits, undermining their effectiveness, if the use of pass-on theories is allowed. The court also held that permitting offensive use of pass-on defense would create a serious risk of multiple liabilities for defendant, and overlapping recoveries would certainly result from the two lawsuits unless the indirect purchaser is unable to establish any pass-on.

In the final section of its opinion, the court conceded that §4 of the Clayton Act has another purpose in addition to deterring violators and depriving them of the fruits of their illegality, it is also designed to compensate victims of antitrust violations for their injuries. However, the majority explained that Hanover Shoe did further the two goals, because the direct purchaser did absorb at least some and often most of the overcharge. Additionally, the court pointed out that deterrence would be served because it was irrelevant to whom damages are paid, so long as someone redresses the violation.

2.2 Considerations behind the Illinois Decision

Proponents of Illinois Brick stand by Justice White′s arguments for the majority, mainly on considerations upon the complexity of calculating pass-on damages and the achieve of optimal deterrence of antitrust law.

The Illinois Brick decision was based on the reasoning that apportioning damages along multiple levels of distribution chains would entail an excessively complex analysis, and it is agreed that problems of such complexity associated with indirect purchaser suits are real, not imaginary. There are several layers of intermediaries between antitrust violators and ultimate purchasers, thus, as pointed out by some scholars, calculating damages to indirect purchasers can potentially be a very daunting task. Additional, is it argued that calculating the pass-on rate to even one level of indirect purchasers can be extremely complex, and the task of determine both demand elasticity and supply elasticity is more difficult.

The supposition of Illinois Brick court that deterrence may be best accomplished by assigning full right to recovery to direct purchasers and duplicative recovery is unacceptable is also consented and supported at length by Landes and Posner. First of all, they contend that the direct purchasers are in the best position to detect an antitrust violation, because they have direct and continuing business relationship with antitrust violators, thus have the greatest incentives to sue and the least difficulties to prove claims. Secondly, they argued that the Illinois Brick rule would lead to reduction of costly and overlapping efforts to identify overcharges, due to the reason that indirect purchasers confront much higher costs to detect overcharges because of the heavy investigations. Furthermore, they held that if benefits of antitrust litigation are diffused among different plaintiffs, individuals′ incentives to sue would be significantly reduced, while incentives to “free ride” on the investment of others would likely increase significantly.

Additionally, some pointed out that procedural devices provided by the Judicial Panel for Multi-district Litigation and the Federal Rule of Civil Procedure to place all claimants and all defendants before same trier of fact are not working well, because cases involving multi-district litigation may be transferred and consolidated only for pre-trial and are then returned to home district courts for trial. It is also evidence that direct purchasers do sue price-fixers and the robust enforcement activities by direct purchasers in the past decade may belie the contention that Illinois Brick has had a negative effect on deterrence[1].

3 Opponents of Illinois Brick

3.1 Overruling Illinois Brick

The three pillars of the Court′s analysis do not bear the weight of the result. As noted above, the main reasons provided by court in Illinois Brick to prohibit recovery of antitrust damages of downstream purchasers are: first, the prohibition may avoid the risk that defendants might have to pay multiple damages; second, direct purchasers are the most efficient enforcers of the antitrust laws; and third, pass-on damages through distribution lines are difficult to calculate. It was argued that the court′s reasoning did not withstand scrutiny, especially in light of subsequent enforcement of state statutes permitting indirect purchaser to recover damages in state antitrust courts.

The Supreme Court, indeed, had effectively abandoned the justification of possible duplicative damages in its later decision. In ARC America, the court upheld state antitrust laws that might require defendants to pay damages under state law, no matter whether they would also be required to pay damages under federal antitrust law.

The rationale of efficient enforcement has been inapplicable to state Attorneys General who act in parens patriae cases on behalf of consumers. With the authority of pre-litigation investigation, the Attorneys General are equally capable as direct purchasers of pursuing antitrust recovery and enforcement[2].

With the development of manipulation and econometric modeling, problem of allocating damages among direct and indirect purchasers still remains, however, is more manageable nowadays. Moreover, the Court has recognized that federal district courts are qualified to evaluate expert testimony since Illinois Brick.

3.2 Compensation

Antitrust systems are comprised of numerous components that combine and interact to produce varying measures of deterrence and compensation. Hanover Shoe and Illinois Brick, however, addressed the deterrent function and explicitly rejected the compensatory function. Thus, the essential difference between the majority and dissent in Illinois Brick was the primacy of deterrence over compensation. The dissent objected to a rule that gave no recourse to actual injured parties, while the majority held that standing rules must ensure the incentive of direct purchasers to enforce the antitrust laws.

As a threshold matter, it is no doubt that compensation of injured parties is the express congressional motivation underlying private antitrust enforcement and denying standing to injured parties is in plain conflict with the intended effect of the Clayton Act. In enacting the Clayton Act, Congress articulated its intention to ensure justice to every man … and give the injured party ample damages for the wrong suffered.

The Illinois Brick rule, which barred the standing of indirect purchasers, is in clear tension with the principles of antitrust law. Precluding recourse to downstream purchasers renders that justice is not delivered “to every man,” and the ability to pass on illegal overcharges by direct purchasers means that the ultimate harm falls only on the parties who have no recourse, and compensation goes to parties who experience little or no harm at all.

Besides, in considering the ability of a particular antitrust law to achieve compensation, the appropriate inquiry is not whether that particular law allows all damaged parties to recover damages, but which injured parties should be allowed to recover. State laws that permit recovery of indirect purchasers can only play a limited role in advancing the goal of compensation, because many indirect purchaser cases are brought as class action and incentives of class action attorneys are considered to be not perfectly aligned with the members they present.

The confliction was also known by the Illinois Brick majority, and the court struck a calculated bargain by trading compensation for deterrence. Rise of multilayered supply chain complicates the task to pursuit both compensation and deterrence. “The decision in Illinois Brick to sacrifice compensation for deterrence would be more justifiable if such a sacrifice were only occasional, but as multilevel supply chains become more the rule than the exception-and the exposure of indirect purchaser to pass-on antitrust injury grows accordingly-the indirect purchaser rule increasingly operates to determine compensation.”[3]

3.3 Deterrence

Adoption of a treble damages remedy in the Clayton Act is designed to enhance the deterrent and punitive effect of private enforcement beyond mere compensation. In Illinois Brick, the court in favor of pursuit of deterrent effect of antitrust sanction even at the cost of abandonment of compensation for injured parties. Unfortunately, the Illinois Brick rule has not achieved the goal it aimed at.

One critique is that direct purchasers may risk their business relationship by suing their suppliers, making direct purchasers less likely to bring antitrust suits than downstream purchasers. Herbert Hovenkamp addressed the Microsoft antitrust litigation as an illustration in which direct purchasers chose to pass-on injury to end consumers to avoid bringing suit against a powerful supplier. Some scholars argued that the indirect purchaser rule not only fails to deter antitrust violation, but also encourages additional antitrust violations. Antitrust violators may manipulate the incentives of indirect purchasers, who are the only parties that have standing to sue, by means of shared rents between illegal cartels and indirect purchasers without explicitly including direct purchasers into an illegal conspiracy[4].

3.4 Complexity

In Illinois Brick, one of the main reasons for barring standing of downstream purchasers is that apportioning damages along the increasingly complicated distribution chain would invoke an excessively complex analysis. Is was this consideration of complexity that compelled the court to sustain the rule against recovery of indirect purchasers, as well as the concern that additional complexity would increase the risk of “duplicative recoveries”.

It was argued that the court overstated the difficulty of calculating the pass-on overcharge in indirect purchaser suits. Harris and Sullivan delivered their contention two years after Illinois Brick and argued that calculating pass-on overcharge is usually not difficult because direct purchasers typically pass-on all or substantial part of the overcharge to indirect purchasers. They contend that the combination of the inelastic demand curve for a good subject and the elastic supply curve of retailers with relatively constant marginal costs lead to high pass-through rates. Besides, although “adjudication to trace a particular overcharge down its particular chain is a daunting one,” the task in many cases might be simplified by applying institutional assumptions and theoretical analysis. Moreover, indirect purchaser suits have been permitted in state courts under Illinois Brick repealer statutes and have been handled well. Federal courts should as well be able to do a good job calculating the pass-on damages.

3.5 Problems of combination of federal and state laws

Complexity of antitrust litigation has been substantially increased by introduction of Illinois Brick rule and is considered far above whatever may be caused by calculating pass-on overcharges. Illinois Brick repealer statutes in states have enabled indirect purchasers to pursue recoveries that are barred in federal courts, thus creating a situation of parallel antitrust litigation in federal and states levels. The parallel actions in both levels proceed with legal confusion over issues of jurisdiction and preemption, force defendants to multiple and simultaneous litigations, and force state courts to entertain duplicative suits.

Another problem incurred by the combination of federal level and varying laws at state level is the creation of ambiguity and arbitrariness of the outcome of antitrust litigation, for the reason that antitrust penalties are determined by the states in which a defendant operates and a variety of factors downstream from the distribution level in which the defendant competes. It is accepted that a rational system of private enforcement should be one that does not vary by the type of violation, jurisdiction or the nature of plaintiffs and that defendants engaged in obvious anticompetitive activities should face generally same level of exposure. Defendants operating in states with no Illinois Brick repealer statute and in which state law has not been found to allow for indirect purchaser suits face lower antitrust penalties than defendants operating in states which allow for indirect purchaser suits. Thus, it may be easily explained that defendants of substantially similar or basically identical situations may receive dramatically different judgment and penalties.

Moreover, it is concerned that the situation of both federal and state indirect purchaser laws gives rise to possibility of imposing penalties exceeding treble damages. The Illinois Brick decision prohibiting indirect purchaser suits was raised due to the desire of the Court to prevent duplicative damage claims that will result in over-deterrence. The current divided remedial system, however, has led to the odd combination of over-deterrence and under-compensation. Besides, the cost of the divided system is significant both for litigating parties and for the public, especially in times of robust enforcement, which tend to generate more private “follow on” litigation[5].

4 EU′s Approach for Indirect Purchaser

There are different approaches to the issue of indirect purchaser suits developing across the EU. The end result of the divergence is a complex web of multiple proceedings with great potential for duplicative recovery.

Laws regarding standing of claimant to bring suit are much narrower in some member states of the EU, such as Germany and Italy, for that they ask for the injured party to be directly targeted by an antitrust violator in order to seek compensation. While in other European jurisdictions, such as England, an individual may have standing where (1) a violator did not have any knowledge of his violation but merely engaged in it by charging a price created under an illegal cartel scheme by its parent corporation, and (2) there was no actual purchase by the plaintiff from his violator. Such differences in standing requirements are liable to breed “forum shopping” among the member states; a trial quite uncharacteristic of an efficient legal arena.

The procedural rules of some member states in the EU, such as Italy, Sweden and France, provide that a plaintiff to meet a strict causation requirement with regard to the defendant′s actions and the injury sustained in a competition law case. The procedural laws of these member states may be said to resemble the indirect purchaser rules of U.S., for the reason that it is unattainable for indirect purchasers to meet the requirement[6].

In December 2005, the Commission published a Green Paper setting out the possible obstacles to successful private actions for damages and identified a number of remedial options in relation to each obstacle for consultation, opening a debate on a number of key issues including whether pass-on defense should be permitted. Within the EU, the solution to the balancing of fairness and efficiency applied by U.S.′s Supreme Court is unlikely to be replicated. As claimed by Commissioner Kroes that a private enforcement system which disables or even discourages final consumers from bringing actions for damages is unacceptable.

The Commission recognized that the passing-on defense substantially increases the complexity of damages claims as the exact distribution of damages along the supply chain could be exceedingly difficult to prove. The Option 23 in the Green Paper calls for the complete exclusion of the pass-on defense. On the other hand, Option 24 calls for a two-step procedure, in which the infringer can be sued by any victim, and in a second step, the overcharge is distributed between all the parties. Thus, Option 24 seems to be the solution to the indirect purchaser problem of the possibility to bolster a great deterrent for parties to engage in antitrust violations.

The Green Paper raised question on the difficult issues of the standing of indirect purchasers and usage of pass-on defense that addressed the conflict between achievement of compensation and deterrence. The judgment of ECJ suggested that all those who suffer loss because of antitrust violation should be able to pursue recovery, and the position is supported by the majority of European governments and competition authorities in their comments on the Green Paper.

The Commission published a White Paper on April 3, 2008 setting out proposals to improve the effectiveness of private actions. The White Paper proposed that defendants should be entitled to invoke the pass-on defense against a claim for compensation. To alleviate the burden of proof on indirect purchasers the White Paper suggested that they should be able to rely on the rebuttable presumption that the illegal overcharges was passed on to them in its entirety.

5 Conclusion

Due to the pass-on effect, indirect purchasers, those who purchase goods from middle-dealers and retailer, are the actual victims injured by price fixing and other antitrust violations. Any overcharge will be easily passed-through by middle-dealers and retailers. However, because of the indirect purchaser rule, established four decades ago in Illinois Brick v. Illinois, consumers and other indirect are unable to sue and get compensation. After reviewing the development of this doctrine, identifying the significant criticisms against it, and discussing the functional approach taken by the European Union, we can safely reach the conclusion that the indirect purchase rule of U.S. should be rebuilt in the step of the way of E.U.

[1] Edward D. Cavanagh. The Illinois Brick Dilemma: Is there a Legislative Solution[J]. Albany Law Review, 2008， 48:294-307.

[2] Edward D. Cavanagh, Illinois Brick. A Look Back and a Look Ahead[J]. Loyola Consumer Law Review, 2004, 27:43-49.

[3] Christopher R. Murray. Rebuliding Illinois Brick: Afunctionalist Approach to the Indirect Purchaser Rule[J]. Southern California Law Review, 2007,81:91.

[4] Maarthe Pieter Schinkel, Jan Tuinstra & Jakob Ruggeberg. Illinois Walls: How Barring Indirect Purchaser Suits Facilitates Collusion[J]. The RAND Journal of Economics, 2008, 39:683.

[5] Andrew I. Gavil. Antitrust Remedy Wars Episode I: Illinois Bric from Inside the Supreme Court[J]. St. John′s Law Revie, 2005, 79:568-571.

[6] Donncadh Woods. Private Enforcement of Antitrust Rules-Modernization of the EU Rules and the Road Ahead[J]. Loyola COnsumer Law Review, 2004, 16:431-449.