Antitrust Revived - Plaintiff Numbers May be on Upswing
12/01/2003

Article originally appeared in Antitrust on 10/01/03

Under both Arizona and federal antitrust laws, agreements to fix prices are illegal. But that does not mean anyone who is harmed by price-fixing has a civil claim for violation of the antitrust laws. The issue of when indirect purchasers should be allowed to sue is a complex one. A standard market includes multiple participants. You have manufacturers who make a product, wholesalers who purchase it in bulk, retailers who purchase from the wholesalers, and then consumers who purchase from the retailers. As a product makes its way through a market, it typically will exchange hands several times through several different transactions. Despite the absence of a direct relation, anticompetitive conduct by upstream participants (e.g., manufacturers) may affect downstream participants (e.g., consumers). If manufacturers fix prices, that will harm wholesalers (direct purchasers) who may, to varying degrees, pass along some of the overcharge to retailers (indirect purchasers) who may pass along some share of the overcharge to consumers (also indirect purchasers).

 The issue before the Court in Bunker’s Glass was “whether indirect purchasers should be allowed to sue for injury resulting from antitrust violations, or whether such suits should be restricted to direct purchasers of goods.”3

BACKGROUND

The history of this controversial issue spans four decades. Beginning with Hanover Shoe, Inc. v. United Shoe Machinery Corp.,4 the U.S. Supreme Court addressed a defense offered by an antitrust defendant that the plaintiff had “passed on” an overcharge caused by the defendant’s alleged antitrust misconduct. The plaintiff, a shoe machinery consumer, claimed that defendant perpetuated a monopoly over shoe machinery by renting but refusing to sell its more complicated and efficient shoe machinery. In response, defendant argued that plaintiff suffered no injury because it merely passed on the additional cost to its shoe customers in the price charged for shoes. The Court rejected defendant’s argument, holding that, except in limited circumstances, a direct purchaser suing for antitrust damages is entitled to the full amount of the overcharge paid by it, even if it was able to pass on some of the overcharge.One reason the Court gave for rejecting the “pass-on defense” was that the defense would unduly complicate antitrust litigation and inhibit vigorous enforcement of antitrust laws. Antitrust litigation would become unduly complicated, the Court maintained, if courts were required to trace an illegal overcharge through a series of transactions: A wide range of factors influence a company’s pricing policies. Normally the impact of a single change in the relevant conditions cannot be measured after the fact; indeed a businessman may be unable to state whether, had one fact been different … he would have chosen a different price.5

The Court also feared that permitting defendants to raise a pass-on defense would jeopardize vigorous enforcement of antitrust laws. Because direct purchasers buy in larger volumesthan do indirect purchasers, the Court reasoned, theyhave more damages and therefore a greater incentive to sue. The Court next considered the significance of passing on an overcharge in Illinois Brick Co. v. Illinois.6 There, indirect purchasers alleged they were injured by an overcharge passed on through two levels of distribution. Plaintiffs requested bids from general contractors to build construction projects. The general contractors, in turn, requested bids from masonry contractors to complete the masonry portions of the projects. Plaintiffs alleged that: (a) defendant concrete block manufacturers engaged in a price fixing conspiracy that forced masonry contractors to pay inflated prices for concrete block, (b) the masonry contractors passed on the overcharge to the general contractor through an inflated bid and (c) the general contractor passed on the overcharge to plaintiffs through an inflated bid.

The Court held that indirect purchasers were not entitled to maintain a cause of action for antitrust damages.7 First, the Court recognized the importance of maintaining uniformity in this area. Having already denied defendants the right to use the pass-on defense in Hanover Shoe, the Court had to prohibit indirect purchasers from using the pass-on offense to recover damages from a defendant. Any other ruling, the Court noted, would create a serious risk of multiple liability for defendants. Second, the Court reiterated the policy considerations identified in Hanover Shoe, including: (a) permitting indirect purchasers to sue for antitrust damages would unduly complicate antitrust litigation by forcing courts to trace overcharges through a series of complex transactions; (b) permitting indirect purchaser recovery would transform antitrust lawsuits into massive efforts to apportion the recovery among all potential plaintiffs; and (c) permitting indirect purchaser recovery would decrease vigorous prosecution of antitrust laws.8 These factors led the Court to conclude thatindirect purchasers are not “injured in [their] business or property” as required by Section 4 of the Clayton Act.9 Antitrust practitioners were still unsure, however, if indirect purchasers could sue under state antitrust laws; some commentators believed federal law may preempt contrary state law on this issue. In California v. ARC America,10 however, the Court held that Illinois Brick does not preclude states from permitting indirect purchasers to recover damages resulting from state antitrust violations.

22 A R I ZONA ATTORNEY DECEMBER 2003

Bunker’s Glass v. Pilkington

Recently, the indirect purchaser issue exploded onto the Arizona scene. Almost simultaneously, defendants in three class-action lawsuits under the Arizona Antitrust Act claimed that indirect purchasers were not entitled to sue for antitrust

damages. Why the sudden explosion? It might be coincidence. Or it might be that Arizona courts had yet to preclude indirect purchaser recovery as many other state courts had done and one unpublished but widely disseminated superior court decision had held that Arizona would recognize indirect purchaser recovery. Whatever the reason, each of the trial courts ruled on the issue within three months, with only one court recognizing indirect purchaser standing. In Microsoft Corp. v. Charles Friedman, P.C., Judge Michael O’Melia held that indirect purchasers “can bring [an] action [under state antitrust law], and Illinois Brick does not apply.”11 In Bunker’s Glass v. Pilkington plc, Judge Gary Donahoe held, “Indirect purchasers of a product cannot sue for alleged overcharges due to price fixing.”12 Finally, in Grey v. Philip Morris, Judge Ted Borek held that indirect purchasers may not assert claims under the Arizona Antitrust Act.13 Shortly thereafter, Division One of the Arizona Court of Appeals heard Bunker’s Glass while Division Two heard Grey.The Antitrust Unit of the Arizona Attorney General’s Office played an active role in the Bunker’s Glass appeal, submitting a lengthy amicus brief and participating in oral argument. Both appellate courts reversed and held that the Arizona law permits indirect purchaser recovery.14

THE MAJORITY

In December 2002, the Arizona Supreme Court consolidated Bunker’s Glass and Grey for review. On August 26, 2003, after two oral arguments and extensive briefing, the Court released its opinion, affirming the appellate court decisions. Justice Rebecca White Berch wrote the opinion for the majority, with Justice Ruth McGregor dissenting. The opinion initially identifies “[o]ne goal of antitrust law” as “prevent[ing] entities that possess monopoly power from using that power to illegally overcharge purchasers.”15 It is not clear why the Court identified this goal, as neither Bunker’s Glass nor Grey involved monopoly allegations. Instead, these cases involved allegations that defendants fixed prices in restraint of trade. At any rate, the Court proceeded to address myriad arguments, raised here.

1. PLAIN LANGUAGE OF STATUTE

The Court first looked to the language of the Act, which provides, "A person threatened with injury or injured in his business or property by a violation of the [Act] may bring an action” for damages sustained.16 “Person” is defined as “anindividual, corporation, business trust, partnership, association or other legal entity.”17 Plaintiffs argued the broad definition of “person” includes indirect purchasers. Defendants, while acknowledging the broad definition of “person,” argued that the subsequent restrictive clause of “injured in its business or property”excludes indirect purchasers. They noted that the U.S. Supreme Court twice determined that indirect purchasers do not suffer such injury when interpreting virtually identical language under the federal antitrust laws.18 The Court held that the plain language of A.R.S. § 44- 1408 permits injured indirect purchasers to sue for antitrust damages. The Court characterized defendants’ argument as relying not on the plain language of the statute but on the judicial construction of a federal antitrust provision.19

2. federal guidance clause

The parties hotly contested the significance of a federal guidance clause in the Act, which states: “It is the intent of the legislature that in construing this article, the courts may use as a guide interpretations given by the federal courts to comparable federal antitrust statutes.”20 Defendants argued that this provision was dispositive, precluding indirect purchasers from bringing antitrust claims. They emphasized that this provision was specifically added by the Arizona legislature and its courts had never before departed from federal antitrust law. The Court gave multiple reasons for rejecting defendants’ interpretation of the federal guidance clause. The Court strongly rejected the argument that federal precedent was intended to be dispositive of interpretation of the Arizona Antitrust Act, concluding that the guidance provision does not manifest “a legislative intent to rigidly follow federal precedent on every issue of antitrust law regardless of whether differing concerns and interests exist in the state and federal systems, and irrespective of whether uniformity among the states or between the states and the federal system could be achieved by doing so.”21 Then, in possibly the most controversial language of the opinion, the Court opined that the clause provides no guidance with respect to indirect purchaser standing because it was enacted three years prior to Illinois Brick.22 At the time the clause became law, the Court said, the relevant federal precedent was In Re Western Liquid Asphalt Cases,23 in which the Ninth Circuit permitted indirect purchasers to sue for antitrust injury. Consequently, the Court reasoned, “If the legislature had any specific case law regarding indirect purchasers in mind when it included the guidance clause, it would have been the holding of Western Liquid Asphalt, a case in which the State of Arizona participated as an indirect purchaser plaintiff.”24

The Court also explained that, if the legislature’s goal in enacting the guidance clause was to foster national uniformity in antitrust laws, that goal is out of reach as no uniformity exists in antitrust laws around the country. “Thus, the quest for uniformity is a fruitless endeavor and Arizona’s ruling one way or the other neither fosters nor hinders national uniformity.”25 Last, the Court observed that, to the extent that uniformity is a desirable objective, the type of uniformity the legislature would have intended would be with regard tothe type of conduct that offends antitrust law. “Thus, the goal of the uniform act appears to be uniformity in the standard of conduct required, not necessarily in procedural matters such as who may bring an action for injuries caused by violations of the standard of conduct.”

3. Judicial activism

More generally, defendants argued any decision on indirect purchaser recovery must emanate from the legislature rather than the judiciary. The Court disagreed: “We do not view our rejection of Illinois Brick as judicial activism because the legislature granted the right of action to indirect purchasers in § 44-1408. We simply reject the judicial interpretation of the parallel federal act that would prohibit suits by indirect purchasers despite the statutory language granting such a right of action.”27

4. Policy considerations

Finally, the Court weighed the policy considerations cited in Illinois Brick. The risk of multiple liability is less significant in Arizona, the Court reasoned, because its courts are not constrained by Hanover Shoe. Furthermore, experience demonstrates that Arizona trial courts can handle such issues.28 The Court characterized the complexity of proving damages through multiple levels of sales as both daunting and overblown. In any event, the Court concluded that Arizona trial courts are equal to the task.

THE DISSENT

In her dissent, Justice McGregor raised two points. First, she maintained that the legislature intended Arizona antitrust law to conform with federal antitrust precedent. She argued that A.R.S. § 44-1412 and the Prefatory Notes to the Uniform Act “reveal an intent that Arizona develop a body of antitrust law consistent with federal precedent.”29 Second, she disagreed with the majority opinion’s characterization of the issue as one of procedural standing rather than substantive antitrust law. This is significant because the notes accompanying the Uniform Act urge uniformity with regard to substantive antitrust law, and if indirect purchaser recovery is a substantive antitrust law theory, it follows that Arizona would adopt the federal precedent.30 In the end, Justice McGregor urged that this important question, tied up as it is in competing policy considerations, should be left to the legislature.

SIGNIFICANCE

Bunker’s Glass is significant for reasons other than its holding. First, it suggests that Arizona does not follow Hanover Shoe. As a result, defendants in antitrust litigation may now argue that direct purchaser plaintiffs were not injured because they passed on any overcharge tothe ultimate consumer. This opinion effectively recognizes a new antitrust defense.

Second, the Court suggests that federal guidance clauses, which appear in several Arizona statutes, require courts to apply federal law as it stood when the uniformity provision was enacted, rather than as it currently stands. The reasoning may affect interpretation of these other statutes. Third, the Court left open the real possibility that Arizona could further depart from federal antitrust law. As noted by Justice McGregor in dissent, “the impact of today’s departure from a long-standing practice remains unclear. Apparently, we will now interpret some provisions of the Arizona antitrust act consistently with federal law and, in other instances, disregard federal law, as we do

today.” Thus, controversial federal precedent, such as case law limiting actions alleging predatory pricing, exclusive dealing and misuse of monopoly power, may be “open game” in Arizona. Each of these and other such issues, most of which have never been addressed by the Arizona courts over the last 30 years, likely will arise rather rapidly as more and more cases are filed here.

Fourth, indirect purchasers now have an argument that they should be entitled to recover damages in actions brought under Arizona’s Consumer Fraud statute. In light of the shared consumer protection basis for antitrust and consumer fraud laws, Bunker’s Glass could be interpreted as expanding the pool of prospective plaintiffs in consumer fraud lawsuits here, as well. What was a relatively little-used statutory scheme, considered largely duplicative of federal law, will now, after 30 years, enjoy major prominence. Fundamental issues remain to be resolved—including the jurisdictional scope of the Act—but the significance of Bunker’s Glass v. Pilkington will be observed and felt for quite some time.

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