Antitrust Arbitration and Illinois Brick

• Author: Mark A. Lemley & Christopher R. Leslie
• Position: William H. Neukom Professor of Law, Stanford Law School; Partner, Durie Tangri LLP/Chancellor's Professor of Law, University of California Irvine School of Law
• Pages: 2115-2133

Antitrust Arbitration and Illinois Brick Mark A. Lemley  & Christopher R. Leslie  ABSTRACT: For nearly 40 years, since the Supreme Court decision in Illinois Brick , federal antitrust law has prevented indirect purchasers from complaining of overcharges caused by antitrust violations. The Court reasoned that direct purchasers are the best and most motivated antitrust plaintiffs. But in its 2013 Italian Colors decision, the Court made it extremely difficult for direct purchasers to bring an antitrust claim in federal court. In doing so, it undermined the policy rationale for Illinois Brick , paving the way for courts to reconsider the ban on antitrust enforcement by indirect purchasers. I. INTRODUCTION ........................................................................... 2116 II. I LLINOIS B RICK : ITS HOLDING AND RATIONALE ........................... 2117 III. ANTITRUST ARBITRATION AT THE DAWN OF I LLINOIS B RICK ....... 2121 IV. THE EVOLUTION OF ANTITRUST ARBITRATION IN THE POST- I LLINOIS B RICK ERA ................................................................................... 2122 V. I TALIAN C OLORS UNDERMINES THE RATIONALE OF I LLINOIS B RICK ........................................................................................... 2128 VI. IMPLICATIONS FOR ANTITRUST LAW ........................................... 2131  William H. Neukom Professor of Law, Stanford Law School; Partner, Durie Tangri LLP.  Chancellor’s Professor of Law, University of California Irvine School of Law. We thank Josh Davis, Christopher Drahozal, Jordan Elias, Rose Hagan, Scott Hemphill, Herbert Hovenkamp, Doug Melamed, Barak Orbach, Tony Reese, and participants at a symposium at the University of Iowa College of Law for comments on a prior draft. © 2015 Mark A. Lemley & Christopher R. Leslie. 2116 IOWA LAW REVIEW [Vol. 100:2115 I. INTRODUCTION The proper role of private enforcement in antitrust law has long been debated. One of the most significant judicial reforms of antitrust law associated with the Chicago School was the Supreme Court’s decision to limit standing to direct purchasers in Illinois Brick Co. v. Illinois . 1 Although that decision has proven controversial, the Illinois Brick doctrine has endured as a principle of federal antitrust law for nearly 40 years. Whatever the merits of the Illinois Brick decision in 1977, subsequent developments have undermined its rationale. In particular, the Supreme Court’s 2013 decision in American Express Co. v. Italian Colors Restaurant 2 undercuts the fundamental premises of the Illinois Brick doctrine. The Illinois Brick majority assumed that direct purchasers were the most motivated and the best situated to enforce antitrust laws that resulted in supracompetitive prices. But Italian Colors makes it very difficult for direct purchasers to enforce antitrust laws in a wide variety of circumstances, because the decision allows potential antitrust defendants to use arbitration clauses in standard-form contracts to ban antitrust class actions and require individual arbitration of antitrust disputes. The result is to deprive overcharged direct purchasers of the tools antitrust law offers for effective enforcement—class action status, a lengthy statute of limitations, treble damages, and, if successful, attorneys’ fees. 3 Without effective opportunities for enforcement by direct purchasers, the rationale for excluding indirect purchasers from bringing antitrust claims collapses. Antitrust law is common law and is often based on policy arguments. The decision in Illinois Brick is no exception. The Court based its reasoning on its assessment of the ability of direct purchasers to enforce antitrust laws effectively. After Italian Colors , that is no longer the case. Old doctrines must give way in light of legal developments (including later judicial opinions) that change the underlying environments and undermine the original policy arguments upon which the old common law is based. By eliminating most antitrust enforcement by direct purchasers, Italian Colors has paved the way for reconsideration of Illinois Brick. 4 1. Ill. Brick Co. v. Illinois, 431 U.S. 720, 737 (1977). 2. Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013). 3. 15 U.S.C. § 15a (2012). 4. It is possible that the Court didn’t actually mean what it said, and that it just wanted to reduce or eliminate private enforcement altogether, as some have suggested doing. See, e.g. , William Breit & Kenneth G. Elzinga, Antitrust Enforcement and Economic Efficiency: The Uneasy Case for Treble Damages , 17 J.L. & ECON. 329 (1974). If you do not think there is a role for private enforcement, you might view Italian Colors as a further step towards its elimination and therefore a good thing, no matter how disingenuous. We start from the premise that at least some private antitrust enforcement is desirable. 2015] ANTITRUST ARBITRATION AND ILLINOIS BRICK 2117 II. I LLINOIS B RICK : ITS HOLDING AND RATIONALE Courts have long been suspicious of competitors as antitrust plaintiffs, 5 in part because competitor interests do not necessarily align well with consumer interests. For example, competitors might object to conduct that benefits consumers, such as aggressive price competition. 6 Beginning in the 1970s, courts began creating limits on competitor standing in an effort to tackle that disconnect. 7 Consumers, by contrast, are, in some sense, the perfect antitrust plaintiffs. They are the intended beneficiaries of the competitive markets that antitrust policy seeks to encourage; consumers are injured by cartels and other anticompetitive conduct, but benefit from aggressive competition on the merits. Accordingly, courts have long permitted purchasers to sue to recover overcharges that result from cartels, 8 though some courts have (incorrectly) questioned customers’ standing to enforce the antitrust laws. 9 In Illinois Brick , the plaintiffs were state and local governments who sought recovery for overcharges that resulted from a cartel that fixed the prices of concrete blocks. But the governments did not buy the blocks directly from the defendants. Rather, construction contractors bought the blocks and used them to build buildings, which the governments later bought. 10 The governments were indirect purchasers; their injury came from the fact that the contractors, who paid an artificially high price, passed that higher price on to them. 11 The Supreme Court held that indirect purchasers could not recover the overcharges that direct purchasers passed on to them. 12 Illinois Brick was decided on two basic policy considerations. First, the Court concluded that because antitrust law permits direct purchasers to recover the entirety of the overcharge they faced, without having to deduct price increases they passed 5. See, e.g. , Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962) (noting that the antitrust laws were passed for “the protection of competition , not competitors ”). 6. See, e.g. , Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977). 7. See, e.g. , Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 110–13 (1986); Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 529–33, 538–46 (1983); Blue Shield of Va. v. McCready, 457 U.S. 465, 473–78 (1982); Brunswick Corp. , 429 U.S. at 489. 8. Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 487–88 (1968). 9. See, e.g. , Ritz Camera & Image, L.L.C. v. SanDisk Corp., 700 F.3d 503, 508 (Fed. Cir. 2012) (reaffirming the ability of direct purchasers to bring antitrust cases over claims that they lacked standing); In re DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 688 (2d Cir. 2009) (same). See generally Christopher R. Leslie, The Role of Consumers in Walker Process Litigation , 13 SW. J.L. & TRADE AMS. 281 (2007). 10. Ill. Brick Co. v. Illinois, 431 U.S. 720, 726–29 (1977). 11. Id. at 727. 12. Id. at 728–29, 736. 2118 IOWA LAW REVIEW [Vol. 100:2115 on to their own customers, 13 allowing indirect purchasers to also sue for the same antitrust violation would create a double recovery. 14 The Court considered reversing the rule allowing direct purchasers to recover the entire overcharge without deduction, but rejected that argument because of its second conclusion: that direct purchasers were the best positioned to enforce antitrust law. 15 The Court interpreted its prior decision to reject a passing-on defense to antitrust claims to support the proposition “that the antitrust laws will be more effectively enforced by concentrating the full recovery for the overcharge in the direct purchasers rather than by allowing every plaintiff potentially affected by the overcharge to sue only for the amount it could show was absorbed by it.” 16 Further, the majority concluded that denying standing to indirect purchasers was more consistent with “the legislative purpose in creating a group of ‘private attorneys general’ to enforce the antitrust laws” because direct purchasers could sue for “the full extent of the overcharge paid by them [without having] to apportion the overcharge among all that may have absorbed a part of it.” 17 The Court also felt that direct purchase overcharges were easier to measure than pass-throughs, particularly if courts had to allocate the injury between the direct and indirect purchasers. 18 The dissent worried that indirect purchasers would be short-changed. 19 The majority responded that allowing direct purchasers to recover the entirety of the overcharge would not only be simpler to calculate, but would also promote more vigorous antitrust enforcement by centralizing the incentive to sue in one party who could recover all the losses. 20 In short, Illinois Brick reflected an economic conclusion that one, but only one, overcharged purchaser in the downstream chain should be entitled to sue, and that for various reasons the simplest and most effective solution was for the...