The Problem of Duplicative Recovery Under Federal and State Antitrust Law

• Publication year: 2014
• Author: By Kyle W. Mach and Bradley E. Markano

THE PROBLEM OF DUPLICATIVE RECOVERY UNDER FEDERAL AND STATE ANTITRUST LAW

By Kyle W. Mach and Bradley E. Markano¹

I. INTRODUCTION

Violations of the antitrust laws can have serious consequences for consumers and other players in the US economy. Understandably, federal and state legislatures have imposed significant penalties for those who commit such violations, and particularly for those who do so deliberately. These include not only criminal penalties, such as monetary fines and prison time, but also very substantial civil liabilities, with some allowing plaintiffs to recover treble damages.

Standing alone, any one of these types of actions—federal or state, criminal or civil—could serve as a strong deterrent to illegal behavior, and rightly so. But antitrust actions often do not come one-by-one. Instead, overlapping regulatory schemes allow concurrent enforcement by federal prosecutors, state attorneys general, and a long list of private plaintiffs, which can simultaneously hit defendants with enormous overlapping liabilities for the same conduct. Taken together, these liabilities create what Judge Richard Posner has called a "cluster-bomb effect" on the subject defendant,² in which the costs of the anti-competitive conduct are borne repeatedly through related litigation of many different types in many different fora.

Some would argue that even "excessive" antitrust damages are justifiable.³ The goal of the antitrust laws is not merely to redress plaintiffs' losses on a case-by-case basis, but also "to further a State's legitimate interests in punishing unlawful conduct and deterring its repetition."⁴ In some cases, these interests could be best served through fines and other liabilities that exceed the amount of ill-gotten gain and the amount of the harm caused.⁵ Some argue that extra-compensatory damages may actually be necessary for effective deterrence in certain circumstances, because potential malefactors will discount the expected value of punishment by the probability that they might "get away with it."⁶ Large recoveries may also encourage private civil litigants to pursue claims which might otherwise have too little value to merit litigation. In appropriate circumstances, this could alleviate the burden on government regulators while enhancing deterrence.⁷

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But there is a limit to how far these arguments can take us. Grossly elevated liabilities raise the risk of undesirable over-deterrence. Industries may respond to the risk of excessive antitrust liability by raising prices or leaving the business entirely.⁸ Thus, windfall recoveries for relatively few plaintiffs could result in unnecessarily inflated prices for the general population—precisely the opposite of what antitrust laws are intended to achieve.⁹

Furthermore, excessive liability may be simply unjust. The potential for extreme punishment could encourage firms to settle even insubstantial claims, rather than betting the company on a jury trial on the merits. In part to prevent precisely this kind of inequitable result, the Supreme Court has held that the Due Process clause of the Constitution forbids repeat payment of the same debt and imposes a cap on excessive punitive damages.¹⁰

Needless to say, it can be difficult for some to feel sympathy for those accused of antitrust violations, particularly willful antitrust violations. But a full accounting of the total liabilities that threaten antitrust violators reveals that, in many cases, the total liability is unjustifiably high. As this article discusses, the "cluster-bomb" that threatens antitrust defendants leads to a risk of liability that in many cases violates practical, and perhaps constitutional, limits on excessive damages, and tilts the scales unfairly against defendants.

In this article, we begin by briefly discussing four separate, but overlapping, forms of antitrust liability: criminal prosecution, federal civil claims, state civil claims, and claims brought by the state acting on behalf of citizens in parens patriae. Reviewing the intersections between these four types, we show how easily a single antitrust violation can result in multiple liabilities for defendants. Then, we briefly assess the public policy and potential constitutional problems that arise from this explosion in liability. Finally, we conclude by introducing a few plausible methods by which litigants, courts and legislatures could mitigate the worst excesses of the current system.

II. A SINGLE ANTITRUST VIOLATION CAN SPAWN A TREMENDOUS VARIETY OF RELATED ACTIONS AND RAISE THE RISK OF DUPLICATIVE RECOVERIES

To establish the weight of antitrust penalties under the status quo, consider a fictional entity, Corporation X, which participates in illegal, collusive price fixing that results in overcharges (prices exceeding the non-collusive "but for" price) in an aggregate amount of 100 million dollars. Corporation X is based outside of the U.S., and its products only reach the market after being integrated into assorted other more complex units, in a chain of intermediate buyers and sellers that spans several other non-U.S. jurisdictions. Some of these products are sold without any knowledge of their ultimate destination or use, and with little expectation of liability in the United States. Although this may appear to be a highly stylized scenario, antitrust practitioners will recognize its similarity to a substantial number of recent cases.

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Throughout the chain of distribution, there are numerous customers who can claim to have been injured, and multiple regulatory entities that may seek to punish the alleged antitrust violator. The result is a staggering degree of liability, which is rarely considered at a single time, or even before a single court. We summarize here some of the most prominent sources of that liability.

A. Federal Criminal Charges

Under federal law, both civil and criminal antitrust violations are governed by the Sherman Act, which proscribes "[e]very contract, combination . . . or conspiracy" in restraint of interstate or foreign commerce.¹¹ As with an alleged civil violation, criminal prosecutors must show "(i) an agreement to concerted action, such as a combination or conspiracy formed by two or more entities; (ii) that the agreement unreasonably restrained trade or commerce; and (iii) that the restrained trade or commerce is interstate or international in nature."¹² In addition, criminal claims require prosecutors to establish subjective intent—but courts have sometimes found that the burden of proof for this element is quite low.¹³

Although violation of the Sherman Act was once a misdemeanor, punishable by fines limited to $50,000 and up to one year's imprisonment, Congress reclassified such violations as felonies in 1974, and since then "potential criminal fines have increased dramatically."¹⁴

The stakes of criminal prosecution were brought home in 2012 with the record-tying fine of Taiwanese corporation AU Optronics ("AUO"), which was found guilty of conspiring to fix prices on liquid-crystal display ("LCD") panels. In one of only a few major antitrust cases recently to go to trial, Judge Susan Illston of the Northern District of California fined the corporation $500 million, and sentenced each of three senior executives to three years in prison and additional $200,000 fines.¹⁵

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But even this fell far short of the penalties sought by federal prosecutors, who asked for a $1 billion fine and ten year prison terms. During sentencing, the prosecutors argued that the Alternative Fine Statute¹⁶ allows criminal fines up to twice the gain or twice the loss caused by the violation—in this case, a figure far exceeding the Sherman Act's statutory maximum penalty of $100 million.¹⁷ And the calculations recommended by the U.S. Sentencing Guidelines suggested fines between $936 million and over $1.8 billion.¹⁸ However, Judge Illston limited the fine to the jury's determination of actual damages, at least in part "because AU Optronics had already paid out millions to settle a class-action lawsuit and still faced other lawsuits in the United States and around the world."¹⁹

While the fines issued to AUO were exceptional even among high-profile antitrust cases, they are representative of a trend toward larger and more frequent fines.²⁰ As of June this year, the DOJ had already issued $709 million in fines for criminal antitrust violations, and was on track to easily surpass last year's high of $1.02 billion in total fines.²¹ The largest of these fines was $425 million, levied upon Japan-based Bridgestone Corp., which saw an increased penalty due to its status as a "repeat offender" after allegedly failing to disclose conspiratorial behavior in 2011.²² And criminal prosecution is very often just the first of many claims for antitrust defendants: An adverse criminal verdict may presage unfavorable civil outcomes in federal and state courts.²³

B. Federal Civil Claims: Illinois Brick and Hanover Shoe

When that civil litigation comes, at least some of it will be brought under federal law. These federal claims, and the available defenses, are subject to a number of important limitations. For our purposes, the most important of these limitations originate with the Supreme Court's decisions in Hanover Shoe²⁴ and Illinois Brick.²⁵

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The defendant in Hanover Shoe, a manufacturer of "complicated and important shoe machinery," maintained an illegal monopoly, which led to increased prices for the direct purchaser, a shoe manufacturer.²⁶ However, the defendant claimed that the plaintiff had suffered no real injury, because the inflated cost of machinery had simply been passed down the chain of production in the form of higher shoe prices for consumers.²⁷

The Supreme Court rejected the "passing-on" defense for two reasons. First was the difficulty of calculating the actual harm suffered by any given plaintiff downstream of the direct purchaser, given the "wide range of factors" at play and the concern...