Indirect Purchaser Antitrust Lawsuits, Illinois Brick, and Apple v. Pepper (Part 1)

Thanks to a 1977 US Supreme Court case called Illinois Brick v. Illinois, class-action-antitrust plaintiff claims may look strange.

You might expect to see named plaintiffs for a class of allegedly injured parties suing defendants (and it is usually multiple defendants) under the federal antitrust laws for damages. And you do see that—those are usually called the “direct purchasers.”

But what is unexpected is that you also often see another separate group of putative class members suing for the same alleged anticompetitive conduct in the same federal court, except they are suing under state antitrust laws—but only some state antitrust laws—for damages. These are usually called the “indirect purchasers.”

(The indirect purchasers also often sue for injunctive relief under federal antitrust law.).

This doesn’t seem to make much sense. What is going on here?

Good question.

I’ll do my best to explain.

But first, I want to remind you that even though Bona Law represents both plaintiffs and defendants in antitrust litigation, we do not typically represent class action plaintiffs in antitrust cases, and in fact, represent defendants in antitrust class actions. Indeed, this has been a large part of my career, going back to my time at Gibson, Dunn and DLA Piper. So—for that reason—I may be biased on these plaintiff antitrust class action v. defendant issues. That bias could seep into my description and explanations below.

Let’s use an antitrust price-fixing case to illustrate how this works (as many large antitrust class action cases involve price-fixing anyway):

So let’s say that the world figures out that the Antitrust Division of the Department of Justice is investigating three companies, making up an industry, for price-fixing. How did the world figure that out? Well, maybe DOJ obtained criminal indictments or a public company had to make note of it in its SEC filing?

You will then often see a blizzard of antitrust filings in federal courts throughout the country by an industry of antitrust class action plaintiff lawyers. As described above, some of these will be for direct purchasers and some for indirect purchasers.

Simply stated, a direct purchaser is someone that purchased a product directly from a defendant. An indirect purchaser is someone that purchased the product that came from a defendant, but not directly—instead, through some intermediary like a retailer or distributor.

If both direct purchasers and indirect purchasers are part of the same lawsuit or suing a single group of defendants under the same claim, there is this sticky question of, even conceding that there was price-fixing, who was damaged and by how much? That is, the price-fixing may have increased the prices that the direct purchasers literally paid compared to the but-for world without price-fixing, but what if the direct purchasers were retailers or distributors that merely passed along all or some of that overcharge to people that purchased from them (i.e. indirect purchasers)? Then the direct purchasers weren’t really injured or their damages were less than the amount of the overcharge from defendants’ price-fixing.

What do you do with that?

Well, in 1968, the Supreme Court in Hanover Shoe, Inc. v. United Shoe Machinery Corp. said you had to ignore that problem. That is, the Supreme Court forbid antitrust defendants from raising as a defence that the direct purchasers had passed on any overcharge.

Okay, well, sometimes if you ignore a problem, it will go away.

But then indirect purchasers began suing under the federal antitrust laws and defendants were thus potentially subject to paying damages twice: Once to direct purchasers that had passed on overcharges (they couldn’t use that as a defence) and a second time to indirect purchasers who had received the overcharge from direct purchasers.

This hardly seemed fair, so the United States Supreme Court in the classic case of Illinois Brick v. Illinois decided in 1977 to put a stop to it: Henceforth, indirect purchasers could no longer sue for damages under the federal antitrust laws. So—again—the Supreme Court essentially said that we were just going to ignore the problem of pass-through from direct purchasers to indirect purchasers.

The Illinois Brick Court actually described three primary reasons for refusing to allow indirect purchaser suits for damages under the federal antitrust laws. First, doing so would allow for more effective enforcement of the antitrust laws (as splitting rewards for the overcharge among two different classes might dilute incentives of one or the other to file federal antitrust claims). Second, prohibiting indirect purchaser federal antitrust claims would avoid complicated damages calculations. And finally, allowing both direct and indirect purchaser federal antitrust claims would create the potential for duplicative damages against defendants.

Maybe now the problem would go away?

Nope.

This time, the problem was that those pesky states also often had their own antitrust laws and many of them expressly passed Illinois Brick repealer laws to allow indirect purchasers to sue under state antitrust law for pass-on antitrust damages. So indirect purchasers began suing under these state antitrust laws at the same time that direct purchasers were suing under federal antitrust laws for damages. And, now, both often sue in the same federal court.

Perhaps recognizing the problem with this, the issue again came before the US Supreme Court in California v. ARC America Corp (1989). If you’ve been following along, you probably expect me to tell you that the Supreme Court said, no, allowing the indirect purchasers to sue for pass-on damages at the same time that defendants could defend against direct purchasers for pass-on doesn’t make much sense. So you might expect that the Court either said that the indirect purchasers couldn’t sue, or we are going to scrap the whole thing (both Hanover Shoe and Illinois Brick) because we realized that ignoring the problem didn’t work.

Well, that didn’t happen. Instead, the Supreme Court basically said to everyone: “Just deal with it.” And that is pretty much where we are left now. Both direct purchasers and indirect purchasers sue in federal court under parallel laws at the state and federal levels, with sometimes conflicting claims and arguments, and everyone has just sort of dealt with it the best they could even though it really doesn’t make much sense.

So when the US Supreme Court decided to review Apple v. Pepper, involving a monopolization claim against Apple and some question about whether plaintiffs were indirect or direct purchasers, there was some [question, worry, excitement—depending upon your perspective] that the Supreme Court may finally fix this mess.

In a throwback to the old days when novels were often published in serial form or in the 1980s when the words “To Be Continued” showed up on the screen almost 30 minutes in and the show was just getting good, let’s stop here and make this the end of Part I.

Stay tuned for part 2 when we find out what happened when the Supreme Court decided Apple v. Pepper. Don’t read the opinion, or it will spoil it for you.

TO BE CONTINUED