A Legal Framework For Indirect Purchaser Class Actions

1
A Legal Framework For Indirect Purchaser Class
Actions

• Why Understanding the Economics of Pass-Through
  Matters More Than Ever

Paul H. Friedman Partner
2
Indirect Purchaser Claims Arise Under State Law

• Hanover Shoe v. United Shoe Machinery Corp., 392
  U.S. 481 (1968)
• The victim of an overcharge is damaged within the
  meaning of 4 of the Clayton Act to the extent
  of the overcharge
• The pass-on defense generally is not available
  even if the plaintiff passed on all or part of
  the overcharge
• No defensive use of pass-through under federal
  antitrust law

3
Indirect Purchaser Claims Arise Under State Law

• Illinois Brick Co. v. Illinois, 431 U.S. 720
  (1977)
• Hanover Shoe principle bars an indirect purchaser
  from maintaining a claim against a remote seller
  for illegal overcharges allegedly passed down
  through the distribution chain
• No offensive use of pass-through

4
Indirect Purchaser Claims Arise Under State Law

• States adopt Illinois Brick repealers
• 25 states and D.C. explicitly permit direct and
  indirect purchasers to recover damages for state
  law antitrust violations
• Other states permit indirect purchasers to
  recover under state consumer protection laws
• California v. ARC America Corp., 490 U.S. 93
  (1989) holds no preemption of state law indirect
  purchaser statutes

5
CAFA Increased the Likelihood of Federal Court
Jurisdiction

• Prior to 2005, most jurisprudence on pass-through
  came from the state courts
• The Class Action Fairness Act of 2005 (CAFA)
  significantly expanded federal diversity
  jurisdiction over class actions
• Several district courts have applied CAFAs
  relaxed diversity jurisdiction requirements to
  support jurisdiction over indirect purchaser
  class actions
• In re Intel Corp. Microprocessor Antitrust Litig.
• In re OSB Antitrust Litig.

6
Pass-Through Is an Essential Element of an
Indirect Case

• Direct purchaser must prove i) a violation
  ii) impact and iii) amount of damages
• Indirect purchaser must prove the above AND
  pass-through
• Proof of impact has been far more troubling for
  plaintiffs proposing class certification of
  indirect purchasers. Because indirect purchasers
  must demonstrate that any overcharges resulting
  from the illegal action of the defendants have
  been passed on to them, an entirely separate
  level of evidence and proof is injected into
  indirect purchaser litigation. Karofsky, 1997
  WL 34504651 at 11

7
Pass-Through Is an Essential Element of an
Indirect Case

• Every indirect purchaser must prove antitrust
  injury or impact
• Requires proof that
• The indirect purchaser paid more than it would
  have absent the alleged illegal conduct
• The higher price resulted from the alleged
  illegal conduct
• In other words, the remote purchaser must show
  that the original unlawful conduct caused the
  remote purchaser to pay more

8
Pass-Through Is an Essential Element of an
Indirect Case

• Since indirect purchaser does not deal directly
  with the alleged wrongdoer, indirect purchaser
  must show that all intermediaries passed through
  some or all of the overcharge
• Pass-through must be shown at each level of
  distribution
• If any intermediate absorbs the price increase,
  there is no pass-through

9
Pass-Through Must Be Addressed At Class
Certification

• Rule 23 (b)(3) requires plaintiffs to demonstrate
  that they have a method that uses common
  class-wide proof to show that each proposed class
  member paid more than it would have by reason of
  the alleged conspiracy
• Where individualized inquiries of impact
  predominate, certification should be denied

10
A Case Study In re OSB Antitrust Litigation

• Indirect purchasers of oriented strand board
  (OSB), a building material used in home
  construction, sued on behalf of
• Buyers of new homes
• Buyers of home renovation services
• Do-it-yourselfers who bought OSB

11
A Case Study In re OSB Antitrust Litigation

• Confounding factors affecting class-wide proof of
  pass-through
• Complex distribution channels
• Different product/different market
• OSB accounted for tiny fraction of cost of home
• Most home buyers were 1-time buyers during class
  period
• Different supply and demand factors affecting OSB
  and housing markets

12
A Case Study In re OSB Antitrust Litigation

• Court denied certification of proposed home buyer
  class
• Plaintiffs have not shown that impact and
  causation are susceptible of common proof
• Court rejected plaintiffs economic testimony
  because expert failed to identify the variables
  needed to prove theory of pass-through of OSB
  overcharges to home price
• Court faulted plaintiffs economist for relying
  almost entirely on economic theory and
  generalizations about market competitiveness and
  elasticities of supply and demand without
  analyzing the competitiveness or elasticities of
  actual housing markets.

13
A Case Study In re OSB Antitrust Litigation

• Court did certify DIY class
• Plaintiffs economist traced channels of
  distribution from manufacturer to distributor to
  reseller and found pass-through nearly 100
• Plaintiffs economist appears to have considered
  appropriate variables and data in creating
  regression
• Plaintiffs showed that impact to end users who
  purchased actual OSB is susceptible of common
  proof

14
A Case Study In re OSB Antitrust Litigation

• OSB court relied heavily on the following passage
  from Illinois Brick
• Under an array of simplifying assumptions,
  economic theory provides a precise formula for
  calculating how the overcharge is distributed
  between the passer and its customers (passees).
  Even if these assumptions are accepted, there
  remains a serious problem of measuring the
  relevant elasticities, the percentage change in
  the quantities of the passers product demanded
  and supplied in response to a one percent change
  in price. In view of these difficulties it is
  unrealistic to think that elasticity studies
  introduced by expert witnesses will resolve the
  pass-on issue

15
Whats Next?

• Will Congress adopt the AMCs proposal
• Overrule Illinois Brick and Hanover Shoe
• Allow removal of indirect purchaser actions
• Allow consolidation of direct and indirect
  purchaser actions
• Limit damages to overchargestrebled
• Apportion damages among all plaintiffs based on
  actual damages suffered

16
Whats Next

• Will the ECs White Paper on Private Damages for
  Cartel Infringement lead to new damage actions in
  Europe
• Indirect purchaser actionsincluding actions by
  residual purchaserswould be allowed
• Passing-on defense would be available
• But indirect purchasers would benefit from
  rebuttable presumption that illegal overcharge
  passed on to them in entirety
• Overcharge and lost profits both would be
  recoverable

17
Whats Next

• The need for economic analysis of pass-through
  will only grow

18
A Legal Framework For Indirect Purchaser Class
Actions

• Why Understanding the Economics of Pass-Through
  Matters More Than Ever

Paul H. Friedman Partner