The Illinois Brick Damages Edifice: Demolition or Deconstruction?

• Author: Gregory K. Leonard
• Position: Economist, Charles River Associates, Inc., and Editorial Board Vice Chair for Economics, Antitrust Law Journal
• Pages: 315-339

THE ILLINOIS BRICK DAMAGES EDIFICE:

DEMOLITION OR DECONSTRUCTION?

G

REGORY

K. L

EONARD

*

When a young economist is introduced to the world of litigation consulting,

among the first overarching legal principles she learns is that the purpose of

compensatory damages, given that liability has been established, is to return

the plaintiff to the economic position it would have been in absent the defen-

dant’s unlawful conduct.

1

The compensatory principle appeals to economists,

who have a long tradition built around the welfare economics notions of

“compensating variation” and “equivalent variation”—measures of the change

in an individual’s income needed to maintain a given utility level in the face

of a change in the price or quality of one or more goods that the individual

consumes.

2

Later, however, when the eager young economist encounters antitrust liti-

gation, and specifically the framework for calculating damages in a price-

fixing case under Section 4 of the Clayton Act, confusion ensues. She is in-

formed that, given the Supreme Court’s Illinois Brick ruling, only direct pur-

chasers are entitled to recover damages in such cases and that these damages

take the form of overcharges on actual purchases.

3

Indirect purchasers, includ-

ing final consumers, are out of luck under federal law. But, the economist

asks, how does denying damages to indirect purchasers square with the idea

that compensatory damages should return injured parties to the position they

would have been in absent the challenged conduct? Well, she is told, limiting

damages to direct purchasers and basing direct purchaser damages on

overcharges avoids duplicate recovery, saves courts from the complex task of

determining the damages sustained by downstream entities in the distribution

* Economist, Charles River Associates, Inc., and Editorial Board Vice Chair for Economics,

Antitrust Law Journal.

1

Damage awards’ dual roles of compensation and deterrence are discussed below.

2

H

AL

R. V

ARIAN

, M

ICROECONOMIC

A

NALYSIS

161 (3d ed. 1992).

3

Illinois Brick Co. v. Illinois, 431 U.S. 720, 728–29 (1977).

315

316

A

NTITRUST

L

AW

J

OURNAL

[Vol. 84

chain, and, by making antitrust litigation more effective, enhances deterrence.

4

But, the economist points out, the overcharge may not be a good measure of

the economic injury the direct purchaser actually sustained, a further apparent

departure from compensatory damages.

5

Yes, the economist is told, but over-

charge damages give direct purchasers a stronger incentive to sue and, any-

way, do not worry about indirect purchasers because a number of states have

enacted “Illinois Brick repealer” laws or otherwise allowed indirect purchas-

ers in those states to recover damages.

6

At this point, the young economist is

likely to decide that the framework for awarding damages in overcharge cases

in the United States is something of a mess and not the result of a thoughtful,

coherent design.

Economists are not alone in questioning how damages are calculated in

overcharge cases. Legal scholars and practitioners have also been troubled by

the divergence of the Illinois Brick framework from the compensatory princi-

ple, as well as the shortcomings of the defendant’s overcharge as an appropri-

ate measure of the actual damages.

7

These concerns are longstanding, dating

back to the Illinois Brick decision itself, which was controversial when issued

8

and motivated the enactment of overrides and other measures by state

lawmakers.

9

Despite various efforts to do away with Illinois Brick, its approach to how

damages are calculated in overcharge cases survives to the current day.

10

With

the Supreme Court’s recent Apple v. Pepper decision, however, another door

may have opened for reconsideration.

11

But, what should replace the Illinois

Brick framework? And what would the implications of replacing it be?

Part I discusses what economics has to say about the economic losses sus-

tained by downstream entities resulting from overcharges imposed by entities

at the top of a distribution chain and how the economic losses caused by the

4

See, e.g., ABA S

ECTION OF

A

NTITRUST

L

AW

, I

NDIRECT

P

URCHASER

L

ITIGATION

H

ANDBOOK

465–71 (2d ed. 2016).

5

To make matters worse, under Hanover Shoe, a defendant is prohibited from arguing that

the overcharges overstate the direct purchaser’s economic losses because the direct purchaser

passed on the overcharges to indirect purchasers. Hanover Shoe, Inc. v. United Shoe Mach.

Corp., 392 U.S. 481, 488–90 (1968).

6

ABA S

ECTION OF

A

NTITRUST

L

AW

,supra note 4, at 23–25.

7

For recent expressions of these concerns, see Andrew I. Gavil, Consumer Welfare Without

Consumers? Illinois Brick After Apple v. Pepper, 7 J. A

NTITRUST

E

NFORCEMENT

447 (2019), and

Herbert Hovenkamp, Apple v. Pepper: Rationalizing Antitrust’s Indirect Purchaser Rule, 120

C

OLUM

. L. R

EV

. F

ORUM

14 (2020).

8

Hovenkamp, supra note 7, at 14.

9

Gavil, supra note 7, at 450.

10

For example, in 2007, the Antitrust Modernization Commission proposed substantial

changes to the way damages are calculated, including the overruling of Illinois Brick. A

NTITRUST

M

ODERNIZATION

C

OMM

’

N

, R

EPORT AND

R

ECOMMENDATIONS

267 (2007).

11

Gavil, supra note 7, at 448–49.