Cleaning Up the Illinois Brick Mess.

AuthorMostoufi, Golnoosh
  1. INTRODUCTION TO THE ILLINOIS BRICK DOCTRINE 264 II. BACKGROUND OF ILLINOIS BRICK AND THE CIRCUIT SPLIT THAT LED TO APPLE 266 A. The Foundations of Standing in Antitrust Cases 266 1. Hanover Shoe Paves the Way to Illinois Brick's "Mess" 266 2. Closer Look at Illinois Brick 267 a. Disparate Attitudes Towards Illinois Brick and Subsequent Efforts to Mediate 268 B. The Circuit Split Giving Way to the Supreme Court Granting Certiorari in Apple 270 C. The Supreme Court's Decision in Apple 272 III. ANALYSIS OF APPLE'S IMPACT ON THE ILLINOIS BRICK DOCTRINE AND TECHNOLOGY INDUSTRY 273 A. Implications of the Apple Ruling 273 B. How Illinois Brick and Apple Can be Reconciled 275 IV. RECOMMENDATIONS TO REFORMING THE ILLINOIS BRICK DOCTRINE 277 A. Proposed Legislative and Scholarly Solutions 278 1. Replacing the Illinois Brick Doctrine 278 2. Modifying Illinois Brick Repealers Statutes at the State Level 279 B. How the Supreme Court Should Proceed in Future Cases Where Illinois Brick is Invoked 281 1. Large-Scale Reform the Court Could Implement 281 2. Minimal Reform the Court Could Implement 281 V. CONCLUSION 282 I. INTRODUCTION TO THE ILLINOIS BRICK DOCTRINE

    Price fixing and other antitrust violations most frequently injure indirect purchasers--those who purchase goods through retailers and other intermediaries rather than directly from the antitrust violator. (1) This latter group of retailers and intermediaries are referred to as "direct purchasers," and they generally evade injury by "passing on" any overcharges to their purchasers, who are often consumers. Pass-on is defined as the process whereby: "[A]n entity in a chain of distribution adjusts its price upward to compensate for an overcharge by a prior party in the chain... [s]ellers normally pass on costs downward in the chain of distribution from the manufacturer to the ultimate purchaser." (2) As a result, consumers and indirect purchasers ultimately become the ones paying an "artificially inflated price," making them the true victims of passed-on overcharges. (3) Despite this, it currently stands that indirect purchasers are unable to obtain any form of relief or compensation. (4)

    Plaintiffs who wish to bring suit under federal antitrust laws must first demonstrate "antitrust standing," which is the doctrine that a claimant may not bring suit "unless the alleged injury suffered was proximately caused by the defendant's anticompetitive conduct." (5) In general, prospective plaintiffs may bring antitrust suits pursuant to Section 4 of the Clayton Act, (6) which provides a right to sue for treble damages (7) to "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws." (8) Accordingly, Section 4 is critical for injured consumers to recover from any passed-on costs as it creates a private right of action for injuries caused by antitrust violations. (9) However, in the seminal case of Illinois Brick Co. v. Illinois (10)--and to a lesser extent, its predecessor Hanover Shoe, Inc. v. United Shoe Machinery Corp. (11)--the Supreme Court limited private treble damage actions to antitrust violators' direct customers (12) or "direct purchasers." This left no remedy for subsequent purchasers or "indirect purchasers," the group that most frequently suffers substantial harm from such overcharges. (13)

    The Illinois Brick doctrine (14) has not existed without controversy. Antitrust law is traditionally understood to have two primary goals--compensation and deterrence. As such, the Illinois Brick doctrine is primarily criticized for effectively denying compensation to the very parties injured most frequently by antitrust violations. (15) Further, the doctrine has been condemned on grounds that it seemingly provides amnesty to antitrust violators and for the discord "between the justifications for the rule and the protracted effects of its application." (16) As one commentator notes, subsequent court decisions have "one by one, twisted and turned... Illinois Brick Co. v. Illinois into an incomprehensible mess." (17) Thus, such case law has not only denied injured plaintiffs standing to sue, but also confused lower courts on how to apply the indirect purchaser analysis and even made it difficult for potential defendants to know when their actions violate the doctrine. (18)

    The Ninth Circuit's opinion in In re Apple iPhone Antitrust Litigation (19) arguably added to the post-Illinois Brick "mess" as it diverged from the Eighth Circuit's long-standing opinion in Campos v. Ticketmaster Corp. (20) Both cases were parallel in implicating questions of antitrust standing with respect to the technology industry and electronic commerce (e-commerce) practices. (21)

    In Ticketmaster, the Eighth Circuit categorized purchasers of Ticketmaster tickets as "indirect purchasers" pursuant to Illinois Brick, and thus denied them standing to sue. On the other hand, in In re Apple, the Ninth Circuit deemed purchasers of Apple's iPhone and iPhone apps as "direct purchasers" within Illinois Brick, granting them the right to sue. Accordingly, the Court granted certiorari in Apple Inc. v. Pepper (22) to determine whether Apple consumers--that is, iPhone owners--indeed have federal antitrust standing to bring suit against Apple for the practices it employs when regulating its App Store. In a narrow 5-4 ruling, the Court in Apple found that consumers who bought apps from the Apple App Store were "direct purchasers" who could sue Apple for its alleged monopolization.

    This Note argues that despite the Court's clarification of the reach of the Illinois Brick doctrine in Apple, underlying issues associated with the doctrine persist and exacerbate the consumers plight in vindicating their rights under Section 4 of the Clayton Act. Thus, the Court should seek reform of the Illinois Brick doctrine in a way that is consistent with the goals of antitrust law. Part II of this Note explores the line of cases related to the development of the Illinois Brick doctrine, followed by an in-depth look at the circuit split between the Eighth Circuit and Ninth Circuit, and, finally, a detailed overview of the Court's decision in Apple. Part III analyzes the impact of the Apple ruling on the Illinois Brick doctrine and the technology industry as a whole. This Part will show that while the Apple Court moved in the right direction by affording consumers "direct purchaser" status, unresolved issues remain with the doctrine--especially in that consumers who are "indirect purchasers" still lack any recourse to bring private antitrust claims. In response to this, Part IV outlines recommendations to the Illinois Brick doctrine and specifies how the Court should proceed in future cases that invoke the Illinois Brick doctrine.

  2. BACKGROUND OF ILLINOIS BRICK AND THE CIRCUIT SPLIT THAT LED TO APPLE

    This Part will first take an in-depth look at the case history surrounding federal standing for damages in antitrust disputes. This will be followed by a discussion on the particular circuit split that emerged following the Ninth Circuit's ruling in In re Apple, (23) which seemingly departed from the Eighth Circuit's established ruling in Ticketmaster, (24) and ultimately led to the Court granting certiorari. Finally, the Court's recent decision in Apple will be examined in more detail.

    1. The Foundations of Standing in Antitrust Cases

      1. Hanover Shoe Paves the Way to Illinois Brick's "Mess"

        Within the realm of antitrust litigation, damages as a remedy have traditionally been granted "only to the immediate victims of the anticompetitive conduct ('direct purchasers'), and not to downstream parties claiming 'pass-through' damages ('indirect purchasers')." (25) "Pass-through" refers to the recurring issue whereby the effects of anticompetitive conduct are "passed-through" a distribution chain. (26) Thus, only the overcharged direct purchaser has standing to bring an action under Section 4 of the Clayton Act, (27) precluding others in the chain of manufacture or distribution. (28)

        The Court first addressed the issue of standing in Hanover Shoe, (29) wherein a shoe manufacturer brought an action for treble damages under Section 4 of the Clayton Act against the manufacturer of shoe machinery for allegedly using its monopoly over the shoe-manufacturing-machinery market to lease machines to the shoe manufacturer at supracompetitive prices. (30) United attempted to prove that Hanover had no standing under the meaning of Section 4 of the Clayton Act because it had passed on any illegal overcharge to those who bought the shoes by virtue of raising the prices it charged for the shoes. (31) In other words, United contended the illegal overcharge was absorbed by Hanover's customers, indirect purchasers of United's shoe machinery, who were the persons actually injured by the antitrust violation. (32) The Court rejected United's "defensive" use of the pass-on theory, finding that except in certain limited circumstances, a direct purchaser suing for treble damages under Section 4 of the Clayton Act is injured within the meaning of the statute by the full amount of the overcharge, no matter who ultimately bears the cost of that injury. (33)

        The Court cited two primary reasons for barring this defense. First, the Court was unwilling to participate in treble damages actions, viewing it as too challenging to trace the effect of the overcharge on the purchaser's prices, sales, costs, and profits, and to show that these variables would have been different without the overcharge. (34) Second, the Court was concerned that unless direct purchasers were allowed to sue for the portion of the overcharge arguably passed on to indirect purchasers, antitrust violators "would retain the fruits of their illegality," as indirect purchasers "would have only a tiny stake in a lawsuit" and thus, little incentive to sue. (35) Following Hanover Shoe's decision that the pass-on theory is precluded as a defense...

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