Lithium Ion Batteries, Indirect Purchaser Antitrust Class Actions, and the Reality of Pricing

It isn’t easy to be an indirect purchaser antitrust class action plaintiff.

Not only do you have to satisfy the difficult standards for class certification (discussed here), but you also have to prove that the direct purchasers passed on an overcharge from defendants’ alleged anticompetitive conduct.

Before we go further, let’s talk about how direct purchasers and indirect purchasers fit into antitrust class action cases.

Direct Purchasers, Indirect Purchasers, Class Actions, and Overcharges

The most common type of antitrust class actions involve allegations of price-fixing or some other per se antitrust violation that leads to higher prices than the but-for world without the anticompetitive conduct. The increase in prices from the antitrust violation is called the overcharge.

The “overcharge,” of course, isn’t real—it is a number that one or more economists create after combining equations with lots of data and a bunch of assumptions that may or may not be accurate. Everyone does their best and a judge or jury has to sort through it and try to figure out what is right.

Anyway, a “direct purchaser” is a person or entity that purchased products or services from one or more defendants that were accused of violating the antitrust laws. They usually have standing to sue under the federal antitrust laws because, if the allegations are true, they paid higher amounts than they should have for their purchase.

But sometimes these direct purchasers are not end users of the product. Instead, they may be, for example, distributors or retailers that purchaser the product from defendants and resell it to someone else. That someone else is what is called an “indirect purchaser.”

For reasons I won’t get into now, indirect purchasers usually don’t have standing to sue for damages under the federal antitrust laws (Illinois Brick). But many states allow indirect purchasers to obtain antitrust damages under their state antitrust laws.

So when something happens and there is an antitrust blizzard of antitrust complaints filed throughout the country, direct purchasers will sue under the federal antitrust laws and indirect purchasers will sue—also in federal court—under state antitrust laws for damages. (They may also sue for injunctive relief under federal antitrust law).

In addition to winning the antitrust lawsuit, class action plaintiffs must also achieve class certification. And if indirect purchasers want any damages, they have to show that the direct purchasers paid an overcharge resulting from defendants’ anticompetitive conduct and passed some or all of that overcharge to the indirect purchasers.

One final point, I have spent my career on the defendant side of antitrust class actions and, as of the date of this article, Bona Law is representing a defendant in the In re Capacitors Antitrust Litigation. So please note any potential biases.

Court Denies Renewed Class Action Certification Motion for In re Lithium Ion Batteries Antitrust Litigation

The background and introduction was to tell you about the Court’s recent decision in the Lithium Ion Batteries antitrust class action case. In April 2017, we wrote about the Court’s initial class certification denial without prejudice, which meant that plaintiffs could renew their class certification motion once they fixed the identified problems in the motions and expert reports.

Well, the indirect purchasers renewed their motion for class certification and the Court again rejected it. The Court also granted defendants’ motion to strike plaintiffs’ supplemental expert report. You can read the Court’s order here.

To support plaintiffs’ renewed motion for class certification, indirect purchasers submitted a supplemental expert report that attempted to address issues that led to the Court’s last class-certification rejection: updated analysis to address packer pass-through issue, added new data from third parties and new documentary evidence about pricing coordination, and attempted to address the effects of rebates, bundles, discounts, and focal point pricing on pass-through and damages.

 

The expert concluded—remarkably—that the pass-through rate was 100 percent, leading to estimated damages of $573 million for the proposed class.

The defendants and, ultimately, the Court, disagreed.

Significantly, the Court questioned the expert’s estimate that 100 percent of any overcharge from anticompetitive conduct was passed on from direct purchasers to the indirect purchasers. More specifically, the Court dug into the expert’s failure to adequately address the real-world effect of focal-point pricing in his model.

This is interesting because it underscores how difficult it is for indirect purchasers to meet their burden to prove their overcharge percentage.

It used to be that economists, courts, and everyone else assumed that all people were rational when they made economic decisions, so you could build that rationality into a model, throw in some data, and like magic, some numbers will pop out.

I suppose in some ways economic models still work like that, but the assumption that all economic actors are rational actors isn’t something that you can take for granted.

Behavioral economics is now mainstream and a favorite topic for books over the last decade or so is about how people are systematically irrational. Check out Dan Ariely, Richard Thaler,  Cass Sunstein, or Daniel Kahneman for more information.

The Lithium Ion Batteries decision here illustrates this point.

I’ll let Judge Yvonne Gonzalez Rogers explain:

Defendants contend that focal point pricing is prevalent in the pricing of products within the class definition, and will result in no pass-through when a small cost change—such as the estimated $2.16 overcharge for a notebook computer battery here—in the presence of focal points that are wider apart than the cost difference itself. They cite evidence in the literature that retailers use focal points or price points, and that certain focal points, such as prices ending in the digit “9,” increase consumer demand. Retailers thus may assign products with small to moderate differences in costs to the same price point despite cost differences, or may not move a given product to the next higher price point in response to relatively small cost increases. (p. 5).

I know long block quotes aren’t great for the reader, but I thought it would be important to give all of that to you because it shows that calculating an overcharge isn’t just a matter of, well, calculating numbers. You must look at the reality and, in fact, the psychology of how pricing actually works. Here, the focal point issue about ending a price in “9,” is something you have certainly seen if you have ever bought anything. Why is the price $1.99 when it would be easier if it were just $2.00? Behavioral economics.

Plaintiffs’ expert creatively attempted to get around his failure to adequately address the focal point pricing with an interesting theory about quality reductions paired with focal point pricing. I won’t go into it, but the Court easily dismissed it as pure theory without factual support. Plaintiffs’ class certification experts can’t just present economic theories, they have to connect those theories to the facts of the case.

Anyway, it isn’t easy being an indirect purchaser plaintiff in an antitrust class action.

Concurrences Antitrust Event

Finally, Concurrences asked me to notify you—our loyal reader—about a free antitrust event they are organizing in NY with Fordham University and Morgan Lewis (with support from Charles River Associations and Compass Lexecon).

The May 2, 2018 event is called Antitrust in the Financial Sector: Hot Issues and Global Perspectives. You should check it out.