The Misapplication of Associated General Contractors to Cartwright Act Claims

• Publication year: 2014
• Author: By Jodie M. Williams and Kristen M. Anderson

THE MISAPPLICATION OF ASSOCIATED GENERAL CONTRACTORS TO CARTWRIGHT ACT CLAIMS

By Jodie M. Williams and Kristen M. Anderson¹

I. INTRODUCTION

The private right of action under the federal antitrust laws is conferred by Section 4 of the Clayton Act,² which provides: "[A]ny person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor . . . and shall recover threefold the damages by him sustained . . . ." Antitrust standing under Section 4 is distinct from constitutional standing under Article III, in which a showing of harm in fact establishes the necessary injury.³ In Associated General Contractors of California v. California State Council of Carpenters ("AGC"),⁴ the Supreme Court identified certain factors for determining whether a plaintiff has "antitrust standing" under Section 4.⁵

Recently, defendants have urged federal courts to apply AGC to determine whether plaintiffs have antitrust standing to bring state law antitrust claims, including claims under California's Cartwright Act.⁶ According to defendants, because courts may look to the federal laws for "guidance" in interpreting Cartwright Act claims, the AGC standing test should be applied to determine standing under state antitrust law claims as well.⁷ The issue has become most prevalent in Cartwright Act claims brought by indirect purchaser plaintiffs.⁸

From the plaintiffs' perspective, AGC has no bearing on whether plaintiffs, particularly indirect purchasers, have standing to pursue claims under the Cartwright Act. This position is well grounded in California law. California's antitrust laws are broader in scope and deeper in reach than federal counterparts, and expressly grant standing to indirect purchaser plaintiffs.⁹ Although the parameters of antitrust standing under the Cartwright Act have yet to be precisely defined by the California Supreme Court,¹⁰ California state court rulings demonstrate that our high court would not adopt the antitrust standing test outlined in AGC.¹¹ This article examines federal and state courts' analyses of antitrust standing under the Cartwright Act and explains why the courts that applied AGC were wrong to do so.

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II. COURTS SHOULD NOT APPLY FEDERAL ANTITRUST STANDING DOCTRINE TO THE CARTWRIGHT ACT

A. The Cartwright Act Expressly Repudiates the Illinois Brick Bar Against Indirect Purchaser Recovery

The Cartwright Act was enacted in 1907. Prior to 1978, the Act paralleled Section 4 of the Clayton Act, and authorized anyone "injured in his [or her] business or property" by reason of anything forbidden or declared unlawful by the Act to bring an action for treble damages.¹² The Cartwright Act was amended in 1978 to provide that "[s]uch action may be brought by any person who is injured in his business or property by reason of anything forbidden or declared unlawful by this chapter, regardless of whether such injured person dealt directly or indirectly with the defendant."¹³ The amendments were in direct response to the Supreme Court's holding in Illinois Brick Co. v. Illinois.¹⁴

In Illinois Brick, the State of Illinois and 700 localities brought antitrust damages claims against concrete block manufacturers for price-fixing in violation of Section 1 of the Sherman Act.¹⁵ The defendants manufactured concrete blocks and sold them to masonry contractors who submitted bids to general contractors for work on masonry portions of construction projects. The general contractors submitted bids for these projects to the plaintiffs. The plaintiffs sought, as the Supreme Court put it, "to demonstrate that masonry contractors, who incorporated [the] block into walls and other masonry structures, passed on the alleged overcharge on the block to general contractors, who incorporated the masonry structures into entire buildings, and that the general contractors in turn passed on the overcharge to [plaintiffs] in the bids submitted for those buildings."¹⁶

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The Supreme Court held that, in general, only a direct purchaser is "injured in his business or property" within the meaning of Section 4 of the Clayton Act.¹⁷ This holding followed the Court's prior decision in Hanover Shoe, Inc. v. United Shoe Mach. Corp.,¹⁸ where the Court held that the pass-on defense was no longer available to antitrust defendants. More precisely, under Hanover Shoe, defendants could no longer argue that plaintiffs who had purchased a product directly from defendants did not have standing under Section 4 of the Clayton Act because the plaintiff passed on the overcharge to its customers.¹⁹ In Illinois Brick, the Court applied the rule symmetrically to the offensive use of the pass-on theory by plaintiffs.²⁰ Driving the Court's decision were policy concerns about the danger of multiple liabilities and the complexity of proof of damages.²¹ The Court determined that indirect purchasers could not recover damages by reason of violations of the federal antitrust laws.²²

Justice Brennan dissented from the Illinois Brick majority opinion. According to Justice Brennan, "[i]t would indeed be 'paradoxical to deny recover[y] to the ultimate consumer while permitting the middlemen a windfall recovery.'"²³ Justice Brennan explicitly rejected the contention that an indirect purchaser should not be allowed to sue, as a matter of law, if the price-fixed product is a component part of the purchased item.²⁴ He concluded that antitrust standing must extend to "those within defendant's chain of distribution."²⁵

The 1978 amendments to the Cartwright Act did not constitute a change in, but rather were, "declaratory of [ ] existing law."²⁶ Also known as the "Illinois Brick repealer" law, the amendments wrote into the Cartwright Act a repudiation of Illinois Brick's ban on indirect purchaser suits.²⁷ As the California Supreme Court recently explained in Clayworth v. Pfizer, Inc.,²⁸ the Illinois Brick repealer law was introduced specifically to "prevent a federal case interpretation of the Sherman Act precluding an indirect purchaser's standing to sue in antitrust actions [i.e., Illinois Brick] [from] being applied to actions under the Cartwright Act."²⁹ In Clayworth, the California Supreme Court considered whether the pass-on defense should be permitted under California law. In concluding that the defense may not be asserted, the court confirmed that the Cartwright Act was amended to protect indirect purchaser actions in the wake of Illinois Brick.³⁰ It further explained that California's Legislature, in amending the Cartw right Act, "fully embraced" Justice Brennan's dissenting opinion in Illinois Brick.³¹

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In California v. ARC America Corp.,³² the U.S. Supreme Court held that Illinois Brick repealer laws, such as the law passed by California, are not preempted by federal antitrust laws or the policies announced in Illinois Brick.³³ The Court expressly stated that it would be "inappropriate" to consider the policies identified in Illinois Brick as defining what federal law allows states to do under their own antitrust laws.³⁴ Moreover, "Illinois Brick, as well as Associated General Contractors and Blue Shield, all were cases construing § 4 of the Clayton Act; in none of those cases did the Court identify a federal policy against States imposing liability in addition to that imposed by federal law."³⁵ As a result, since 1978, California's antitrust laws have diverged from federal law in favor of an enlarged set of plaintiffs with standing to sue for antitrust violations.

B. Neither California State Courts Nor the Ninth Circuit Have Interpreted the Cartwright Act as Encompassing the AGC Factors

Because California permits a broader range of plaintiffs to sue under the Cartwright Act, the analysis determining who has antitrust standing under the Act must also be broader than the analysis under federal law. The California Court of Appeal considered this issue in Cellular Plus, Inc. v. Superior Court,³⁶ which involved a lawsuit by a number of individual consumers and corporate sales agents against the two licensed providers of cellular telephones in San Diego.³⁷ The question before the court was whether plaintiff Cellular Plus, an indirect purchaser, had standing to sue under the Cartwright Act.³⁸ The court determined that it did,³⁹ explaining that to have standing under California's antitrust laws, plaintiffs must allege injuries that are "not secondary, consequential, or remote, but the direct result of the unlawful conduct and were the kind of injuries the antitrust laws seek to prevent."⁴⁰ The fact that a plaintiff is not a competitor of the defendant was not fatal to plaintiff's claims; the Cartwright Act does not '"confine its protection to consumers, or to purchasers, or to competitors, or to sellers. . . . The Act is comprehensive in its terms and coverage, protecting all who are made victims of the forbidden practices by whomever they may be perpetrated.'"⁴¹ Nowhere did the appellate court even mention the standing factors set out in AGC.

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The court in Cellular Plus reasoned that to have standing under the Cartwright Act, plaintiffs must properly allege "antitrust injury."⁴² Quoting the Supreme Court's decision in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,⁴³ the Court of Appeal explained that, as in federal antitrust cases, California plaintiffs must also "prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful."⁴⁴ But, "[a]lthough California law similarly requires an 'antitrust injury,' the scope of that term is broader" than the term "antitrust injury" for purposes of the federal antitrust laws, such as the Clayton Act and the Sherman Act.⁴⁵ Because the Cartwright Act provides for lawsuits by injured persons who dealt either directly or indirectly with the offending parties, the more "restrictive definition" of antitrust injury under federal law does not apply to California state...