An Economic Treatment of Pass Through in Indirect Purchaser Antitrust Litigation

• Jurisdiction: United States,Federal
• Citation: Vol. 30 No. 1
• Publication year: 2020
• Author: By Armando Levy and David Sunding
• topic: Antitrust and Competition,Commercial Litigation,Contracts,Civil Procedure

AN ECONOMIC TREATMENT OF PASS THROUGH IN INDIRECT PURCHASER ANTITRUST LITIGATION

By Armando Levy and David Sunding¹

In order to be certified as a class action, indirect purchasers in Illinois Brick repealer states carry the burden of showing antitrust impact through common proof on a classwide basis. In this article, we describe the most recent results in the economics and marketing literature regarding retail pass through.

I. INTRODUCTION

Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), established a doctrine that only direct purchasers of product and services suffering from antitrust injury have standing to sue under federal antitrust law.² However, indirect purchaser plaintiffs have been able to establish standing under state laws in the so-called Illinois Brick "repealer" states since California v. ARC America Corp., 490 U.S. 93 (1989). In ARC America, the Supreme Court held that Illinois Brick interpreted only federal antitrust law and states could allow indirect purchasers to seek damages under state law.³ Many states and the District of Columbia reaffirmed an indirect purchaser's right to recover damages by passing Illinois Brick repealer statutes that expressly allow for indirect purchaser actions.⁴

For these cases, in addition to proving an overcharge to the direct purchasers, it is necessary to calculate a "pass-through" rate of the overcharges from direct purchasers to the indirect purchasers (end users). The pass-through rate is the percentage of wholesale price changes that appear in the retail price. Depending on the product and market, the product may pass through several hands before finally arriving to the end-user indirect purchasers. Hence, a pass-through analysis necessitates examination of the institutional details of the supply chain and the market structure at each of its levels. In fact, it is this additional burden (among others) that is cited among the justifications for the Illinois Brick doctrine.⁵

Pass-through analyses form an essential part of work an economist expert would perform in an indirect purchaser antitrust litigation matter. Although indirect purchaser antitrust litigation is not exclusively brought as a class action, class actions form the great majority of indirect purchaser cases. Several recent decisions on class certification for purported classes of indirect purchasers have turned on the failure of the plaintiffs' experts to establish pass through for all or virtually all class members.⁶

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As we discuss below, economic theory is generally inclined to view positive pass-through rates as consistent with the behavior of profit-maximizing firms. The rate itself may vary greatly depending on the structure of wholesale and retail markets, but the fact of pass through (that is, whether or not it is positive) is a standard feature of most conventional microeconomic models. However, the literature on marketing and merchandising focuses on tactics meant to drive cross-product sales for multi-product retailers such as grocery and "big box" retail stores. These tactics include so called "loss-leader" sales, "focal" pricing or "pricing on the Nines," "everyday low pricing," and "high/low pricing." These tactics serve the strategy of maximizing store profits, but depending on how the tactics are implemented, they may suspend pass through for a period of time for certain products. Hence, empirical investigations based on statistical models of the relationship between retail and wholesale prices are often carried out on the relevant product markets to determine if this is the case.

This article describes the economic and marketing theory for retailer pricing and its relation to the pass-through of wholesale costs. The next section lays out the standard for class certification, while the following section discusses the economic and marketing theories of pass-through. The final section concludes.

II. CLASS CERTIFICATION REQUIREMENTS

In order to certify a class, the plaintiffs must meet the requirements Rule 23 of the Federal Rules of Civil Procedure. Specifically, plaintiffs must satisfy each aspect of Rule 23(a), which reads:

a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:

(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
(4) the representative parties will fairly and adequately protect the interests of the class.

The plaintiffs must also show that the class action fits within at least one of the three types of class actions described in Rule 23(b). For damages actions, the plaintiffs' proposed state-law damages classes must satisfy Rule 23(b)(3)'s predominance and manageability requirements. Rule 23(b)(3) reads:

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(3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. The matters pertinent to these findings include:

(A) the class members' interests in individually controlling the prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the controversy already begun by or against class members;
(C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and
(D) the likely difficulties in managing a class action.

In the context of an antitrust claim brought by members of a purported indirect purchaser class, the plaintiffs bear the burden of showing that all or nearly all members of the class suffered antitrust injury. Hence the fact of pass through is necessary to establish the antitrust standing of purported class members whereas the size of pass through is relevant to the size of damages to indirect purchasers.

With the new more rigorous environment for the class certification process, courts often require a more rigorous showing of damages methodology at the class certification stage. Indirect purchasers do not buy directly from the defendants. Depending on the product at issue, there may be more than one path by which the products travel from the defendant producers to the retailers who sell to the members of the class. At the class certification stage, an economist will examine the details of the supply chain to determine if wholesale cost changes are passed through to retail prices and whether or not the determination requires individualized inquiries. In our discussion...