Chipping away at the Illinois Brick wall: expanding exceptions to the indirect purchaser rule.

• Author: Duffy, Matthew M.

INTRODUCTION

For over thirty years, the Supreme Court's decisions in Illinois Brick Co. v. Illinois (1) to deny compensation to indirect purchasers (2) harmed by antitrust violations has drawn consistent criticism. (3) Illinois Brick limits private treble damage actions to the antitrust violator's direct customers, leaving subsequent purchasers who often suffer substantial harm without a remedy. The well-publicized Microsoft antitrust litigation provided a glaring example of the problems with this rule. Large scale purchasers who suffered considerable harm could not recover, while the only parties who could sue refused to do so for fear of economic retribution. (4) In 2007, the Antitrust Modernization Commission issued its report recommending legislative repeal of Illinois Brick, and most commentators agree that reform is needed, even if they disagree on how to correct the rule. (5) Such sweeping calls for change have gone unanswered for over three decades, with the Supreme Court reaffirming Illinois Brick (6) and Congress failing to provide a legislative fix. Making a bad situation worse, many lower courts deny indirect purchaser actions even where none of the policies animating Illinois Brick support this result. Rather than add to the chorus calling for the Illinois Brick wall to come down, (7) this Note identifies circumstances, like those in the Microsoft litigation, in which none of Illinois Brick's rationales apply. Where this happens, exceptions should be carved out of the rule to remedy the most egregious harm caused by denying indirect purchaser recovery. Exceptions currently receive inconsistent treatment, often accompanied by inadequate or inaccurate policy considerations. This Note creates a coherent, flexible approach to identifying and applying exceptions using policy as a guide, rather than clinging to rigid categories and rules.

Part I begins by identifying deterrence and compensation as the twin aims of antitrust law before discussing Illinois Brick, which deemphasized compensation and elevated other policy concerns. Part II describes how changes in the antitrust landscape have undermined most of the policy rationales once supporting Illinois Brick. The weaknesses of the rule discussed in Part II bolster the call for exceptions in Part III. Part III describes a variety of situations in which allowing an exception promotes antitrust goals more effectively than the rule itself, and it culminates in an argument for exceptions when the direct purchaser is unlikely to sue, (8) rather than limiting indirect purchaser suits to cases where the direct purchaser is legally unable (9) to do so. The latter approach undermines not only the goals of Illinois Brick, but the goals of antitrust law generally in a number of cases. While greater exceptions may not make Illinois Brick ideal, exceptions will do more to strengthen enforcement, promote deterrence, and compensate victims than will fruitless attempts to create an ideal rule. (10) Further, exceptions do not require the Court or Congress to reach consensus on new normative goals. Exceptions do nothing more than bring Illinois Brick back in line with the normative goals Congress and the Court already established--goals which they appear unwilling or unable to relinquish in pursuit of an ideal rule.

1. THE POLICY OBJECTIVES OF ANTITRUST LAWS AND ILLINOIS BRICK

   1. The Policies of the Sherman Antitrust Act: Deterrence and Compensation

      With the passage of the Sherman Antitrust Act, Congress created a vigorous dual enforcement regime designed to deter anticompetitive behavior by subjecting violators to both government prosecution (11) and private treble-damage actions. (12) Vigorous enforcement was needed to combat the substantial harm trusts caused. (13) Responding to public sentiment, eliminating this harm was Congress's central goal in passing the Sherman Act. Indeed, when the Sherman Act was passed, "[t]he general disposition of the public was not in doubt.... The kind of remedy that the public desired was also clear enough: it wanted a law to destroy the power of the trusts." (14) Recognizing that scarce prosecutorial resources would not be sufficient to accomplish this ambitious task, Congress enlisted the help of "private attorneys general" (15) to ensure effective deterrence. (16) Using remarkably broad language, Congress authorized private treble damage actions (17) by "any person" harmed "by reason of anything forbidden by the antitrust laws." (18) In sum, private enforcement was designed to "deter violators and deprive them of the fruits of their illegal actions, and provide ample compensation to the victims of antitrust violations." (19) Private enforcers were seen as uniquely situated to ensure compliance with antitrust laws, (20) and their license was commensurate with this position.

      In addition to deterring violations, Congress also reasoned that since private parties--mostly consumers and small competitors (21)--bear the brunt of antitrust violations, sound policy requires compensation. (22) As one congressman described it, the Clayton Act is praiseworthy for "open[ing] the doors of justice to every man, whenever he may be injured by those who violate antitrust laws, and giv[ing] the injured party ample damages for the wrong suffered." (23) Thus, "ensuring recompense for injured parties" and deterring violations stand as the "twin antitrust goals." (24)

   2. The Policies of Hanover Shoe and Illinois Brick

      In Illinois Brick, the two goals of private enforcement arguably came into conflict. (25) The plaintiff filed a treble damage action under the Clayton Act, alleging that manufacturers of concrete bricks conspired to fix prices, causing the plaintiff's suppliers to pay higher prices, which in turn harmed the plaintiffs when this overcharge was passed on to them. (26) On its face, the plaintiff's claim appeared to fall within the Clayton Act. (27) The Court, however, ruled in the defendant's favor, holding that "direct purchasers [are] injured to the full extent of the overcharge paid by them." (28) This is so even if the direct purchaser passed the entire overcharge on to subsequent customers. Consequently, direct purchasers reap a windfall (if they sue and prevail) while the plaintiffs, regardless of the extent of their injury, go uncompensated.

      1. Hanover Shoe

         To understand the Court's reasoning one must look to its decision nine years earlier in Hanover Shoe. (29) There, the defendants claimed that the plaintiff, a direct purchaser, had passed on any overcharge it paid to downstream purchasers, and therefore the plaintiff suffered no injury. (30) The Court rejected this "passing-on" defense, (31) reasoning that a contrary holding would undermine deterrence by leaving private enforcement to indirect purchasers, who "would have only a tiny stake in the lawsuit and hence little incentive to sue." (32) Consequently, if the defense were effective, antitrust violators "would retain the fruits of their illegality." (33) As an alternative, the Court simply decided to grant direct purchasers the entire award, acknowledging that this may be a windfall. (34) The Court rested "on the judgment 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." (35) Requiring apportionment calculations to demonstrate the share of harm borne by the direct purchaser as opposed to subsequent indirect purchasers was not only expensive, it also decreased the direct purchaser's award, thereby diminishing its incentive to sue. Consequently, private enforcement would be left in the hands of poorly-motivated and difficult-to-coordinate indirect purchasers.

         Hanover Shoe also reflected "an unwillingness to complicate treble-damages actions with attempts to trace the effects of the overcharge on the purchaser's prices, sales, costs, and profits, and of showing that these variables would have behaved differently without the overcharge." (36) Not only would it be difficult for courts to examine the complex economic calculations involved in determining how much an overcharge increased prices, given the number of variables, it may be impossible to determine damages. (37) Even if the entire increase in price was passed on, the direct purchaser may suffer harm from decreased sales. Determining price elasticity and weighing the other factors involved in calculating the net effect on profits caused by the price increase of a single input is indeed a daunting task. In any event, defendants would rarely carry their burden, making the increased litigation costs largely wasteful. (38)

      2. Illinois Brick

         In Illinois Brick, rather than facing an antitrust violator seeking to reduce its liability by asserting defensive passing-on, the Court addressed an indirect purchaser attempting to recover by proving overcharges had been passed-on. (39) The Court first asked whether victims could use a damage theory to recover (known offensive passing-on) even if defendants were barred by Hanover Shoe from using the same theory to limit liability (known as defensive passing-on). The Court saw two problems with allowing "asymmetrical" passing-on. First, such a rule would "create a serious risk of multiple liability for defendants." (40) Without a passing-on defense, the direct purchaser would collect an undiluted damage award for the entire injury. If successful, a subsequent indirect purchaser would necessarily collect damages above the amount of the overcharge--trebled. The Court was "unwilling to 'open the door to duplicative recoveries' under [Clayton [section]] 4." (41) Second, even if procedural devices could prevent duplicative recovery, "[t]he principal basis for the decision in Hanover Shoe was the Court's perception of the uncertainties and difficulties in analyzing...