EARLIER THIS YEAR ON JUNE 9

FEDERALISM AND FUTILITY: Hitting the Potholes on the Illinois Brick Road BY DONALD I. BAKER EARLIER THIS YEAR ON JUNE 9 to be precise the 25th anniversary of the Supreme Court s famous Illinois Brick decision passed by without celebration or even comment. This silence was indeed fitting because the ensuing quarter century has exposed the great irony of what had seemed at the time to be a famous victory for antitrust defendants. A Jurisprudential Cul-de-Sac As we know, the Supreme Court, by a 6 3 vote, held that only direct purchasers from cartel members had standing to bring federal antitrust suits for recovery of their losses under Section 4 of the Clayton Act. Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). The net result was that the State of Illinois could not sue the price-fixing brick makers or participate in the settlements of the direct-purchasing contractors who had bought the bricks and built the state s buildings with them. The Supreme Court was moved to interpret Section 4 in this way because of concerns about reducing the incentives of direct purchasers to sue, increased complexity of tracing causation in indirect purchaser litigation, and especially the increased risk of double recovery which would become sixfold recovery under the mandatory trebling feature of Section 4. Illinois Brick was so notable (and surprising) because it seemed a clear departure from the Supreme Court s history of Section 4 decisions that generously treated antitrust plaintiffs on standing and damage questions (a history Justices Brennan, Marshall, and Blackmun emphasized in dissenting). Id. at 748 67. It also seemed a throwback to an earlier era of tort law when privity was generally required for a plaintiff to recover. The decision was unpopular with the political populists who have provided so much of the support for federal antitrust legislation from the time of the Sherman Act onward. This political reaction was present in Washington, Donald I. Baker is senior partner in Baker & Miller PLLC, Washington D.C., which represents both antitrust plaintiffs and defendants. While Assistant Attorney General in Charge of the Antitrust Division at the U.S. Department of Justice (1976 77), he worked on the Solicitor General s amicus brief in Illinois Brick Co. v. State of Illinois, supporting the State s claims, and he made the Government s oral argument before the Supreme Court. but became more prominent and effective in state capitals in some major states (including California, Arizona, and Minnesota). This led to the so-called Illinois Brick Repealer statutes, under which indirect purchasers were given the right to sue for treble damages under state law. The message was quite simple: If the Supreme Court won t let us and other indirect purchasers sue under the Clayton Act, we ll just provide a better remedy under state law. These statutes were plainly inconsistent with the no double recoveries policy that the Supreme Court had made the cornerstone of its Illinois Brick analysis. Defendants argued that therefore these Illinois Brick Repealer statutes ought to be struck down under the Supremacy Clause of the Constitution as repugnant to federal law. The Ninth Circuit agreed with this position in 1987, stressing that the state indirect purchaser claims asserted here conflict most directly with federal policy because they create the risk of multiple liability for defendants. 1 This was not, however, the end of the story. The Justice Department (in the spirit of Reagan Administration federalism) urged the Supreme Court to hear the case and reverse the Ninth Circuit, even though we do not mean to suggest that we agree... that such [indirect purchaser] statutes make for good antitrust policy. 2 The Supreme Court agreed to hear the case and, accepting the Solicitor General s preemption analysis, refused to strike down the state indirect purchaser statutes in California v. ARC America Corp., 490 U.S. 93 (1989), in early 1989. What the Supreme Court said this time unanimously was that there was no evidence that Congress had intended to displace state law in the antitrust area. Indeed, said the Court (in an opinion by Justice White, the author of Illinois Brick), even the Sherman Act had been intended to expand and make more effective state antitrust law. In these circumstances, it found that there could not be federal preemption under the Supremacy Clause, given the Court s prior preemption decisions. The ultimate Supremacy Clause problem is that the no double recoveries policy set forth in Illinois Brick was not a creature of Congress. It was made up by the Supreme Court as a policy interpretation of Section 4 without any evidence that Congress had intended to prevent indirect purchasers from recovering under the Clayton Act, let alone evidence that Congress had intended to prevent states from allowing indirect purchasers to sue. But the no double recoveries pol- 1 4 A N T I T R U S T

icy only makes sense if the states are preempted from establishing a double recoveries regime. This the Supreme Court was unwilling to do in ARC America and thus it opened the door to a burgeoning cascade of state court cases under sometimes quite bizarre statutes. It is federalism at work. But it is not something that antitrust defendants (or those who think we tend to have too much litigation in our society) can feel remotely happy about. That is the great irony of Illinois Brick where a conservative decision led to a populist political reaction that has produced duplicative litigation and recoveries on a scale that the Supreme Court majority could scarcely have imagined in the first place. The Search for Symmetry The Illinois Brick result was certainly driven in part by the majority s desire to be consistent with the Court s earlier decision in Hanover Shoe v. United Shoe Machinery Corp., 392 U.S. 481 (1968). There, in still another opinion by Justice White, the Court had unanimously rejected the defendant s passing on defense. 3 The defendant, which had been found to have monopolized the shoe machinery business in a prior DOJ action, argued that the plaintiff shoe manufacturer would have passed on any overcharge for the shoe machinery in the prices that it charged customers for shoes. The Court rejected the passing-on defense as a matter of law for a number of reasons: A reseller s pricing decisions are often driven by a variety of not-easily-discovered motives. Id. at 493. If the existence of the defense is generally confirmed, antitrust defendants will frequently seek to establish its applicability, thus often generating additional long and complicated proceedings involving massive evidence and complicated theories. Id. Such a theory might result in the liability being pushed all the way down to ultimate consumers, in today s case the buyers of single pairs of shoes, would have only a tiny stake in a lawsuit and little interest in attempting a class action. Id. at 494. Thus, those who violate the antitrust laws by price-fixing or monopolizing would retain the fruits of their illegality because no one was available who would bring suit against them. Treble damage actions... would be substantially reduced in effectiveness. Id. Overhanging the Court consideration of this issue were the celebrated Electrical Equipment Antitrust Cases 4 by far the biggest wave of private treble damage cases ever faced by the federal courts. The defendant manufacturers of turbine generators, transformers, and switchgear had conspired to overcharge the electric utility plaintiffs, who had duly added the over-priced equipment to their rate bases and thus duly passed on the ultimate costs to innocent consumers in the retail electric power rates approved by state public service commissions. The Electrical Equipment defendants were regarded as greater antitrust villains than United Shoe and had a much better passing on defense, which they were vigorously pressing in various courthouses across the country. Also, at the time of Hanover Shoe, the modern Rule 23 of the Federal Rules of Civil Procedure had not been adopted, and the class action practice under it had not developed. Thus the fear of ultimate consumers not having a remedy was more serious in 1968 than it would be today. When Illinois Brick came along nine years later, Justice White s opinion resonated with references to the risks of onesided applications of Hanover Shoe. Thus, a fundamental premise of the decision was that whatever rule is to be adopted regarding pass-on in antitrust damages actions, it must apply equally to plaintiffs and defendants. 431 U.S. at 728. 5 As in Hanover Shoe, the Court pointed to the large difficulties of tracing the effects of overcharges through a successions of sale-resale transactions; and that ultimate purchasers often That is the great irony of Illinois Brick where a conservative decision led to a populist political reaction that has produced duplicative litigation and recoveries on a scale that the Supreme Court majority could scarcely have imagined in the first place. had a small stake in recovering of any recharges. It also emphasizes the risk of duplicative recoveries which seemed to be the Court s most urgent concern during the oral argument. The risk of duplicative recoveries created by unequal application of the Hanover Shoe rule is much more substantial than in the more usual situation where the defendant is sued in two different lawsuits by plaintiffs asserting conflicting, claims to the same fund. Id. at 730. Justices Brennan, Marshall, and Blackmun dissented. Justice Brennan stressed that the majority had pushed aside the fundamental Clayton Act policy of compensating victims in its search for symmetry in dealing with the passing-on questions. Lack of precision in apportioning damages between direct and indirect purchasers is thus not a convincing reason for denying indirect purchasers an opportunity to prove their injury and damages. Id. at 759 (emphasis added). Justice Blackmun was even more blunt. The plaintiffs here, he wrote, are the victims of an unhappy chronology. If Hanover Shoe... had not preceded this case, and were it not on the books, I am positive that this court would be affirming, perhaps unanimously, the judgment of the Court of Appeals. Id. at 737. He added that the Court s effort to be consistent in its application of pass-on... [is] for me a wooden approach, and is entirely inadequate when considered in the light of the objectives of the Sherman Act. Id. at 766. Thus, he lamented, we must now await the passage of another statute. Id. The dissenters seem to have the better of it. Hanover Shoe was about assuring that somebody recover, while Illinois Brick F A L L 2 0 0 2 1 5

is about assuring that the various victims not recover too much. These are different issues that really demand different treatment conceptually. A sauce for the gander rule is simply too blunt. To say to a clear victim that you don t even have standing to make a claim and try to prove it is inconsistent with modern tort policy and appears unfair. Plaintiffs Incentives to Sue Justice White s Hanover Shoe and Illinois Brick opinions also reflected a concern about diluting the effectiveness of private antitrust enforcement if the direct purchasing plaintiffs recoveries were diminished by application of a passing-on rule for either plaintiffs or defendants. In Illinois Brick, he thus wrote, we conclude that the legislative purpose of creating a group of private attorneys general... is better served by holding direct purchasers to be injured to the full extent of the overcharge paid to them than by attempting to apportion the overcharge among all that may have absorbed a part of it. 6 No doubt apportionment of damages with indirect purchasers would somewhat reduce the direct purchaser s incentives to sue. But how much in reality? In follow-on pricefixing cases, the recoveries and attorneys fee awards are generally high for direct purchasers. Moreover, the Clayton Act departs from the normal American rule to provide extra incentives for private antitrust suits: it provides mandatory trebling of damages and a reasonable attorney s fee to a prevailing plaintiff. And the plaintiff can still recover such attorneys fees, even where only nominal actual damage is established, as in U.S. Football League v. National Football League, 887 F.2d 408, 411 13 (2d Cir. 1989). 7 Thus, I do not see that some reduction in direct purchasers incentives including lost windfall opportunities is a serious barrier to the rationalization of the rights and recoveries of indirect purchasers who can prove actual damage. Multiple Recovery Risks Are Magnified by Litigation Tactics and Statutory Shortcuts The risk of duplicative recoveries for the same wrong is a significant concern for any judicial system and especially where any double recovery is subject to mandatory trebling. The Justice Department amicus brief and the dissent in Illinois Brick both argued that federal procedural devices were available to reduce this risk by bringing most parties into a single proceeding. This was not good enough for the majority. Even if the risk of double recovery were substantially reduced by procedural devices, [w]e do not find this risk acceptable. 431 U.S. at 731 n.11. The reality is that the Supreme Court did not eliminate the risk that it feared. Instead the Court set in motion a series of events that have magnified this risk far beyond what anyone imagined back in 1977. First, of course, Illinois Brick generated a strongly adverse political reaction. Congress ducked the issue, but various state legislatures responded with the Illinois Brick Repealer acts allowing indirect purchasers to sue for treble damages under state law. Then, the Supreme Court upheld the constitutionality of these laws in ARC America, under perfectly normal preemption principles. Today, about twenty-three or so states have passed Illinois Brick Repealer statutes covering about half the national population. The other half of the population is more or less where the Supreme Court left it in 1977. The reality is that the Supreme Court did not eliminate the risk that it feared. Instead the Court set in motion a series of events that have magnified this risk far beyond what anyone imagined back in 1977. The risks of duplicative recoveries are enormous in the present system. Direct purchasers and indirect purchasers are suing in separate legal systems and courthouses, even if the suits are brought in the same state. Indirect purchasers located in different states are generally in different proceedings, even where they may be alleging injuries from the same conspiracy. The opportunities for duplicative recovery are magnified by this judicial fragmentation: Both direct and indirect purchasers may recover all (or part of) the same overcharge with no obligations of apportionment between them; Indirect purchasers in different states may pursue inconsistent damage theories in separate proceedings under principles of joint and several liability; and Some state laws provide for recovery of statutory penalties or automatic damages by consumers and other indirectpurchasers based on what could be only a modest showing of any passing-on (assuring that double recovery will occur between the direct and indirect purchasers). Indirect purchasers counsel probably want to keep the world complex and fragmented. Thus, it is now common for a state case action complaint to allege that each member of the indirect purchaser class has less than $75,000 in damages for the express purpose of defeating any effort to remove the case to federal court under the diversity jurisdiction. (Once removed, such cases could, of course, be consolidated with direct purchaser cases under 28 U.S.C. 1404, and 1407.) Finally, as noted, several state legislatures have responded to the Supreme Court s warning that passing-on claims are often hard to prove by creating statutory short cuts that essentially eliminate the indirect purchaser s need to prove the extent of its damage. Thus, in Kansas, Minnesota, and a few other states, the legislature has passed a full consideration statute allowing the indirect purchaser to recover back its entire payment from the defendants once it can show some effect on it from the antitrust wrong. Meanwhile, in 1 6 A N T I T R U S T

Massachusetts, the Supreme Judicial Court has said that a class action for $25 per Massachusetts consumer can be maintained against Vitamins defendants under the state unfair competition act. 8 This result obviously has huge double recovery potential. It was ironic that the Court held (by a 4 3 vote) that this action could be maintained even though the Massachusetts Legislature had declined to amend the state antitrust law to include an Illinois Brick Repealer provision. All these full consideration and automatic penalty provisions can generate large windfalls for plaintiffs; and will also generate significant double recoveries, unless a direct-purchasing plaintiff fails to prove significant damages in their federal cases. (The ultimate judicial irony would be where the federal plaintiffs fail to make their damage claims but the state court still holds or has already held that some overcharge was passed on to the indirect purchasers, thus triggering the state s full consideration or automatic damage remedy.) In sum, the duplicative recovery situation is serious and is likely to get worse as more full consideration and automatic penalty statutes make their way through more state houses. A Road to Justice We face a world of complexity and uncertainty in which opportunism abounds, judicial efficiency is minimized, and some victims go uncompensated while other plaintiffs (and their attorneys) collect windfalls. Meanwhile, defendants can be subjected to not only multiple recoveries for the same wrong, but all the costs and uncertainty of litigating the same wrong in different courthouses under different state laws and procedures. Only if wealth maximization for trial lawyers both plaintiffs and defendants trial lawyers were the goal of national policy could the society have designed the wonderfully random system that we have for redressing antitrust wrongs and compensating antitrust victims in the wake of Hanover Shoe, Illinois Brick, ARC America, and their progeny. While I benefit financially from today s system of uncertainty and duplication, I am totally embarrassed by it as a believer that the rule of law should be based on fairness and efficiency in compensating victims and remedying wrongs in predictable ways. What we have after Illinois Brick is a litigation mess created by the mixture of a questionable judicial decision and various political responses to it. The situation requires a political response in the form of a legislative act that can command reasonably broad support among those interested in antitrust rights and remedies. (We face the need for another statute, just as Justice Blackmun prophesied in his Illinois Brick dissent.) As a starting point, we should go back to the Solicitor General s Illinois Brick amicus brief to provide a somewhat neutral framework for analysis. 9 It was created late in the Ford Administration, filed during the interregnum by Acting Solicitor General Daniel Friedman, and defended by the Carter Administration when it came to office. (I was admittedly in the middle of the exercise.) The Government s brief (filed on January 31, 1977) made several basic points: Both defensive and offensive passing on raised difficult proof problems, but otherwise the policy issues were not the same. Defensive passing on had been rightly rejected in Hanover Shoe because it raised the risk of serious antitrust wrongs going unpunished. Meanwhile a policy allowing offensive passing on rested on the same grounds as the decisions rejecting defensive use of the passing-on claim: the principle that victims of antitrust violations should recover for their losses, and the policy of promoting private enforcement of the antitrust laws. Brief at 4. It is one thing to say that proof of damage may be difficult for an indirect purchaser, and quite another to flatly reject standing for such a claim, without even an inquiry into whether it might be proved in a reasonably precise and efficient manner. Id. at 6. Allocation of damages among direct and indirect purchasers in a single proceeding is appropriate; id. at 25, and it would also be appropriate to reduce the direct purchaser s recovery by the amount overcharged established by an indirect purchaser. Id. at 27 29. Procedural devices can be used to minimize the risks of double recovery. Transfers and consolidations can bring several classes of victims together in a single action. Defendants concerned about multiple recovery may invoke statutory interpleader.., leaving those who claim to be victims of the unlawful conduct to contest among themselves the proper distribution of damages. Id. at 7. This set of comments points in the right direction. Passing on issues should not be treated as being symmetrical as between plaintiffs and defendants claims. Antitrust plaintiffs should be allowed the same right as tort plaintiffs namely the right to try to prove their losses in a precise and efficient manner. Antitrust defendants should be liable for the full amount of any proven overcharge but, subject to procedural devices designed to minimize duplicate recoveries by bringing most the claims for an antitrust wrong into the same courthouse. Thus, what we need is an Antitrust Victims Rationalization Act to solve today s mess. This federal statute would contain the following main features: Illinois Brick would be overruled. Indirect purchasers would be authorized to sue in federal courts under Section 4 of the Clayton Act, subject to realistic proof requirements. Such a result would be much more consistent with modern tort theory. Anyway, the alternative of imposing the Illinois Brick rule on the states under the Supremacy Clause would never ever come close to flying politically. Special case consolidation and managements rules, if necessary, could be enacted to cover suits where both direct and indirect purchasers were making claims. In its Illinois F A L L 2 0 0 2 1 7

Brick brief, the Government pointed to the models of 28 U.S.C. 1404, 1407, and 1335 (relating to transfer, coordinated discovery, and interpleader). Congress, unlike the Supreme Court, could refine these to cover the Illinois Brick situation, and thus both streamline the process and reduce further the double recovery risks. Rules for allocating recoveries between direct purchasers and indirect purchasers would be enacted. This is not the same thing as overruling Hanover Shoe. If the indirect purchaser proves a passed on over-charge, the recovery would reduce proportionately the direct purchaser s recovery for the same transactions. Or a more global approach could be based on a new interpleader-like procedure in which there would be a damage trial leading to a verdict on the defendants total liability, followed by a second damage-allocation trial among the direct and indirect purchasing plaintiffs. Federal preemption of state remedies in this area would be absolutely necessary. 10 Defining the boundaries of such preemption would involve some difficulty, but it should at least cover damage actions arising out of DOJ criminal prosecutions and civil cases for violation of the Sherman Act and Clayton Act. It would be rational, and maybe even useful, also to preempt follow-on cases from enforcement actions by the FTC under the FTC Act or the Clayton Act, but so far, the FTC actions have not raised the same complexities as the follow-ons from DOJ s cartel and monopolization cases. As precedents, we have small but obvious examples of federal preemption of state damage remedies in the export promotion legislation in 1982 and the joint research legislation enacted two years later. 11 This package of provisions would substantially reduce the mindless complexity and duplication that we have today. To that extent, it is rational. Maybe it is rational enough to make progress on Capitol Hill, even in the face of loud arguments from some of the trial counsel who profit from today s complexity. Legislative success would require major business groups and their conservative allies to admit that Illinois Brick was something that they never should have wanted because the bright-line rule was so arbitrary vis-à-vis some real antitrust victims that it was always likely to generate a political counter-revolution to overturn it. It would also require liberals and consumer advocates to admit that it would be much preferable to have all U.S. consumers covered by a rational compensation scheme, rather than half of them not covered at all and the other half covered by an increasingly diverse collection of unevenly applied remedies and windfall recovery schemes. None of us including consumers and enterprises is well served by a system that maximizes litigation costs and legal uncertainties. 1 In re Cement and Concrete Antitrust Litig., 817 F.2d 1435, 1445 46 (9th Cir. 1987). The Ninth Circuit s analysis went beyond multiple recovery risks:. Together Hanover Shoe and Illinois Brick define three purposes or objectives of federal antitrust law in this context: (1) avoiding unnecessarily complicated litigation; (2) providing incentives to direct purchasers to bring private antitrust actions; and (3) avoiding multiple liability for defendants.... [T]he indirect purchaser claims asserted here would impermissibly interfere with the three policy goals outlined in Hanover Shoe and Illinois Brick... [They] would complicate antitrust enforcement... A defendant s ability and willingness to settle its claims with direct purchasers depends in part on the magnitude of the defendant s other obligations, including its obligations to indirect purchaser plaintiffs. [As a result of] indirect purchaser claims..., a defendant will reduce any offer to compromise with direct purchasers.... [T]hey create the risk of multiple liability for defendants. 2 Brief for the United States as Amicus Curiae in State of California v. ARC America Corporation, No. 87-1862 (Nov. 1988). In the brief s only reference to multiple recovery, the Solicitor General said: [T]here is no federal policy against antitrust violators having to pay amounts cumulating to more than three times the overcharge. 3 Justice Stewart dissented, but not from this part of the decision. 392 U.S. at 510 13. Justice Marshall did not participate. 4 Between 1961 and 1964, 1,919 separate antitrust actions were filed against manufacturers of electrical equipment in 36 federal judicial districts. See generally Neal & Goldberg, The Electrical Equipment Antitrust Cases: Novel Judicial Administration, 50 A.B.A. J. 621 (1964). 5 A perceived need for symmetry must have dominated Justice White s thinking in Illinois Brick: he had been a charter member of the Government always wins majority on Supreme Court antitrust decisions during the 1960s and early 1970s and he had been the author of such populist antitrust landmarks as Utah Pie Co. v. Continental Baking Co., 386 U.S. 685 (1967). It is his vote, and that of Justice Stevens (who would prove to be a strong supporter of the Government and private antitrust cases), that were critical to the Illinois Brick result. 6 One can speculate that this argument was intended to help persuade Justice Stevens (who would prove to be such a consistent and vocal champion of strong antitrust rules and remedies) to join the majority made up of more conservative justices with whom he regularly disagreed. 7 See also Sciambra v. Graham News, 892 F.2d 411, 415 17 (5th Cir. 1990). 8 Ciardi v. F. Hoffmann-LaRoche Ltd., 436 Mass. 53, 762, N.E.2d 303 (2002). The critical causation question was not determined by the Court in deciding an appeal from a motion to dismiss. One of my firm s clients is a party in this case. 9 Brief for the United States as Amicus Curiae in Illinois Brick Co. v. Illinois, No. 76-404 (Jan. 1977). 10 An alternative to full preemption, Congress could amend Title 28 of the U.S. Code to allow a party in a state court indirect purchaser action to remove the case to federal court and consolidate it with the suit by a direct purchaser who allegedly passed on the relevant overcharge by the state plaintiff. There would be no jurisdictional minimum, and the state plaintiff s claims would be under state law but subject to ultimate allocation of the direct purchasers recovery between direct and indirect purchasers. For such a system to work, it would still be necessary to preempt the state statutes that provide what are essentially non-damage remedies for indirect purchasers (e.g., the full consideration and automatic damage remedies), because otherwise the direct-purchaser federal plaintiff would be unfairly treated. 11 Export Trading Company Act, 15 U.S.C. 4001 4053; National Cooperative Research and Production Act, 15 U.S.C. 4301 4305. 1 8 A N T I T R U S T