Introduction
Background
Facts
Decision
Comment
Introduction
On July 12 2010, in Clayworth v Pfizer, Inc,(1) the California Supreme Court held that California law bars antitrust defendants from invoking a pass-on defence in most circumstances, even though both direct and indirect purchasers may sue for treble damages. Defendants (or groups of defendants) in antitrust lawsuits are typically accused of illegally overcharging for their products. An overcharge would be borne initially by direct purchasers of the defendant's products such as dealers or distributors, and may be passed on – in whole or in part – to indirect purchasers, such as consumers. If the direct purchasers do pass on the overcharge, a possibility of duplicative recoveries exists when multiple levels of purchasers are permitted to sue the defendant for damages. In such instances, the defendant is likely to argue that the plaintiff passed on the overcharge, which leaves the claimant with no measurable injury and, therefore, no cognisable claims for damages. This argument is referred to as a pass-on defence. The Clayworth decision (discussed below) raises significant questions about the scope of liability under California antitrust law and potentially opens the door for separate antitrust lawsuits to be filed by multiple levels of purchasers and leaves defendants subject to duplicative recoveries.
Background
The US Supreme Court has provided conclusive answers to the questions of whether a pass-on defence is available under federal law and how to avoid duplicative recoveries in federal antitrust lawsuits. In Hanover Shoe, Inc v United Shoe Machinery Corp,(2) the court held that federal antitrust defendants generally may not assert a pass-on defence. The court reasoned that even a direct purchaser that passes on an overcharge will likely be damaged in other ways by the antitrust violation, and that permitting a pass-on defence would potentially compromise antitrust enforcement by barring the parties most likely to sue – the direct purchasers – from recovery. Several years later, as a corollary to the Hanover Shoe principle, the court held in Illinois Brick Co v Illinois that indirect purchasers could not bring private treble damages actions under the federal antitrust laws.(3) Thus, under the federal antitrust enforcement scheme, only direct purchaser plaintiffs are permitted to seek damages and defendants may not assert as a defence that the direct purchaser passed on the alleged overcharge to an indirect purchaser.(4)
After Illinois Brick, many states – including California – enacted laws specifically permitting indirect purchasers to sue for damages under state antitrust laws.(5) Therefore, California law was clear that both direct and indirect purchasers could sue for damages (unlike under federal law). However, it was not clear whether a defendant could invoke as a defence to a direct purchaser lawsuit that the direct purchaser passed on any alleged overcharge to the indirect purchasers.(6) Many assumed that if indirect purchasers had standing, then defendants would be able to assert a pass-on defence in lawsuits by direct purchasers to avoid duplicative recoveries.
Facts
In Clayworth a group of retail pharmacies sued a group of pharmaceutical manufacturers alleging that the manufacturers violated California's antitrust law – known as the Cartwright Act(7) – and state unfair competition laws by conspiring to fix the prices of brand-name pharmaceuticals. The defendants argued that the plaintiffs had passed on the alleged overcharge to consumers who purchased the drugs. After reviewing the parties' evidentiary submissions, the trial court agreed with the manufacturers, finding that the pharmacies had passed on all of the overcharges to consumers. The trial court granted summary judgment for the manufacturers because the pharmacies had sustained no apparent damages. The court of appeal affirmed.
Decision
The California Supreme Court reversed the judgment for the manufacturers. The court analysed the legislative history of the Cartwright Act and its amendments over time, particularly its amendment in response to the Illinois Brick decision, and concluded that, "under the Cartwright Act, as under federal law ... a pass-on defence generally may not be asserted", even though the act differs from federal law in permitting indirect purchasers to sue.(8)
The manufacturers had argued that permitting multiple levels of purchasers to recover while barring the pass-on defence could permit direct purchasers that passed on overcharges to receive a windfall recovery. The court acknowledged that this risk existed, but appeared to find it acceptable. The court stated that the primary purpose of the act is to punish violators and promote free competition. If forced to choose between providing a windfall to direct purchasers that had passed on overcharges but may still have suffered collateral effects of the antitrust violation or antitrust violations going unpunished, the court indicated a preference for the first option.
The manufacturers also argued that permitting multiple levels of purchasers to recover while barring the pass-on defence could lead to duplicative recoveries. Again, the court acknowledged this risk, but noted that trial courts and parties may employ procedural devices such as joinder, interpleader and consolidation to bring all claimants before the trial court to prevent multiple lawsuits. The court further stated that in instances in which it became necessary to allocate damages among various levels of injured purchasers (eg, in a lawsuit involving both direct and indirect purchasers), it would then be permissible for a defendant to assert a pass-on defence to avoid duplicative recoveries. As a general rule, however, the court held that the pass-on defence could not be invoked where there was not at least some apparent risk of duplicative discovery in the case at bar.
Comment
The Clayworth decision raises significant questions about the scope of liability under the California antitrust laws. Permitting both direct and indirect purchasers to sue the same defendant for the same damages while barring the defendant from asserting a pass-on defence presents a risk of duplicative recovery. The California Supreme Court noted several methods by which trial courts could mitigate this risk, but it also acknowledged that the risk of duplicative recovery is a real one. Although the court suggested that an apparent risk of duplicative recovery in a single case would permit assertion of a pass-on defence, that situation was not present in Clayworth and, therefore, the court declined to address it further. As a result, the decision may have far-reaching implications if multiple levels of purchasers, both direct and indirect, bring separate damages lawsuits relying on Clayworth to argue that the defendants are barred from invoking a pass-on defence in each suit. At a minimum, defendants may face the prospect of defending several such suits while attempting to consolidate them to enable assertion of a pass-on defence in a single proceeding.
The California Supreme Court's reliance on consolidation and coordination as the principal tool for eliminating the risk of duplicative liability is troubling for several reasons. First, the court assumed that separate suits by direct and indirect purchasers would be filed at times that permit use of such procedural devices. However, there is no guarantee that will occur and the court offered no guidance on how duplicative liability will be avoided when the underlying assumption does not apply. Second, reliance on such procedural devices fails to account for those situations in which different levels of purchaser are litigating claims arising from the same facts in state and federal courts. Coordination of such proceedings may be difficult and will depend entirely on informal cooperation by the state and federal judges handling the litigation. Moreover, coordination may be constrained by differences in state and federal procedural rules. Third, the court's analysis ignores other, related legal rules, such as the Full Faith and Credit Act(9) and the Rooker-Feldman doctrine,(10) which might have substantive effect on Cartwright Act litigation in federal court. Such issues are bound to arise in subsequent cases and the courts will eventually have to address them.
For further information on this topic please contact William L Monts III or Benjamin F Holt at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email ([email protected] or [email protected]), or Megan Dixon at Hogan Lovells US LLP's San Francisco office by telephone (+1 415 374 2300), fax (+1 415 374 2499) or email ([email protected]).
Endnotes
(1) No S166435, 2010 WL 2721021 (Cal July 12 2010).
(4) The court has suggested potential exceptions to the bar on the use of pass-on theories in federal antitrust cases when direct purchasers are owned or controlled by subsequent purchasers, or resell goods under pre-existing, fixed-quantity, cost-plus contracts, but it has never formally recognised either.
(5) In several other states, courts have interpreted existing antitrust laws to permit indirect purchaser lawsuits.
(6) The handful of California appellate cases discussing the pass-on theory prior to Clayworth acknowledged that the availability of a pass-on defence under state antitrust laws was an "open question". JP Morgan & Co, Inc v Superior Court, 113 Cal App 4th 195, 213 n10 (2003); Global Minerals & Metals Corp v Superior Court, 113 Cal App 4th 836, 852 n10 (2003).
(7) Cal Bus & Prof Code, Sections 16700 et seq.
(8) Clayworth, 2010 WL 2721021, at *17.
(10) See District of Columbia Court of Appeals v Feldman, 460 US 462 (1983); Rooker v Fidelity Trust Co, 263 US 413 (1923). The Rooker-Feldman doctrine bars lower federal courts from exercising what is effectively appellate jurisdiction over state court judgements.
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