The Pass-on Problem in Indirect Purchaser Class Litigation

• Published date: 01 March 1999
• Date: 01 March 1999
• DOI: 10.1177/0003603X9904400105
• Subject Matter: Part I: Antitrust: On the Cutting Edge

The Antitrust Bulletin/Spring 1999

The

pass-on

problem

in

indirect

purchaser

class

litigation

BY CHRIS S. COUTROULIS* and D. MATTHEW ALLEN**

I. Introduction

179

There are two types of price fixing lawsuits. Adirect purchaser

action

is one in which the

plaintiff

purchases

product

directly

from the purported conspirators. An indirect purchaser lawsuit is

one

in which

the

plaintiff-frequently

a

consumer-purchases

product down the distribution chain. In indirect purchaser litiga-

tion, a significant issue is presented that is absent from direct pur-

chaser

litigation-whether

the alleged overcharges were in fact

passed on to the plaintiff or instead absorbed, in whole or in part,

by middlemen in the distribution chain. "Pass-on" occurs when

*Chair of the antitrust and business litigation department in the

Tampa, Florida office of Carlton Fields.

** Shareholder in the Tampa, Florida office of Carlton Fields.

AUTHORS'

NOTE: We wish to thank their colleague, Robert L. Ciotti, Esq.,

for

his helpful comments and overall contribution to this article, as well

as Dr.

Roger

Blair, the

Huber

Hurst

Professor

of

Economics

at the

School

of

Business, University

of

Florida.

for

his insights into the rele-

vant economic considerations.

© 1999by Federal Legal Publications. Inc.

180 The antitrust bulletin

middlemen who have been overcharged adjust their prices to their

customers upward from what they otherwise would have been, in

order

to recover part or all

of

the overcharge. Thus, the actual

prices paid by these customers exceed the prices they would have

paid,

but

for

the conspiracy.

This

article

discusses whether, in

jurisdictions

that

permit

indirect purchaser actions, those actions are amenable to class cer-

tification. Whether alawsuit can proceed as a class action is typi-

cally governed by the jurisdiction's rules

of

civil procedure. In

most states, those rules require that the putative class representa-

tive prove by a preponderance of the evidence that common issues

of

fact and law

predominate

over individual questions. Moreover,

most states' class action rules also require the named plaintiff to

demonstrate that the class action device is a

superior

method

of

adjudication, with the concomitant requirement that the trial as a

class action be manageable.' Based on these governing principles,

apivotal question in consumer indirect purchaser class suits is

whether the named plaintiff(s) can

demonstrate-by

generalized,

common

proof-that

each member of the class was overcharged

and suffered damages, and further, whether there is some general-

ized, common method of assessing the amount

of

damages. Thus,

the critical question becomes whether pass-on, an integral compo-

nent

of

the impact and damages inquiry, can be demonstrated by

such generalized, common proof. Section II sets forth the legal

framework for analysis. Section III examines several legal and

economic issues with which litigants must grapple on the issue

of

whether pass-on can be demonstrated on a classwide basis.

Compare, e.g., Fed. R. Civ. P. 23, with Fla. R. Civ. P. 1.220 (both

setting forth these requirements for actions brought under their respective

(b)(3) sections).

Pass-on problem 181

II. The legal framework

A. The federal

bar

against indirect purchasers

suing

for

price fixing

Any discussion

of

pass-on must begin with

Hanover

Shoe?

There, the Supreme Court found the issue

of

determining pass-on

to be so complex that it announced aprudential federal rule that

antitrust

defendants could not try to show that direct purchaser

plaintiffs were not injured (and therefore had no damages claim)

because

they had passed on the price increase they sustained to

indirect purchasers. Rather, irrespective

of

whether the direct pur-

chasers passed on the price increase, they could sue for the entire

overcharge. The Court reasoned that it should not further compli-

cate

already complex antitrust actions with attempts to trace a

price increase down the distribution chain:

A wide range of factors influences a

company's

pricing policies. Nor-

mally the impact of a single change in the relevant conditions cannot

be measured after the fact; indeed abusinessman may be unable to

state whether, had one fact been different (a single supply less expen-

sive, general economic conditions more buoyant, or the labor market

tighter, for example), he would have chosen adifferent price. Equally

difficult

to

determine,

in the real

economic

world

rather

than

an

economist's

hypothetical model, is what effect achange in a com-

pany's

price will have on its total sales. Finally, costs per unit for a

different volume of total sales are hard to estimate

....

Since estab-

lishing

the applicability

of

the passing-on defense would require a

convincing showing of each of these virtually unascertainable figures,

the task would normally prove insurmountable.'

As the Supreme

Court

later

characterized

its

Hanover

Shoe

opinion:

"The

principal

basis

for

the

decision

...

was

the

Court's

perception of the uncertainties and difficulties in analyz-

ing price and output decisions in the real economic world rather

Hanover

Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S.

481, 494 (1968). For an excellent discussion of the facts of the case, see

Roger D. Blair &Jill Boylston Herndon, A Note on Hanover Shoe, 43

ANTITRUST

BULL.

351 (1998).

Hanover Shoe, 392 U.S. at 492-93.