Unintended Consequences of Repealing the Direct Purchaser Rule
| Author | Joshua P. Davis and Anupama K. Reddy |
| Position | Research Professor at U.C. Hastings College of the Law/Member of the California Bar |
| Pages | 341-387 |
UNINTENDED CONSEQUENCES OF REPEALING THE
DIRECT PURCHASER RULE
J
OSHUA
P. D
AVIS
A
NUPAMA
K. R
EDDY
*
The direct purchaser rule provides that (1) only direct purchasers can obtain
monetary damages under federal antitrust laws and (2) direct purchasers are
entitled to the full amount of the overcharges they pay, without any offsets.
1
Indirect purchasers
2
cannot obtain damages under federal antitrust law, subject
to a few exceptions that rarely apply.
3
In recent years, a movement to repeal
the rule has gained momentum.
* Joshua Davis is a Research Professor at U.C. Hastings College of the Law; Anupama
Reddy is a Member of the California Bar. We are grateful for valuable conversations with and
edits and comments from Rick Brunell, Eric Cramer, Andy Gavil, Pam Gilbert, Randy Stutz, and
Phil Weiser. All errors remain our own. One or both of the authors were involved in some of the
cases discussed in this article, including: In re Capacitors Antitrust Litigation (No. III), No. 3:17-
md-02801-JD (N.D. Cal. filed Dec. 5, 2017); Cung Le v. Zuffa, LLC, No. 2:15-cv-01045-RFB-
BNW (D. Nev. filed Dec. 16, 2014), In re High-Tech Employees Antitrust Litigation, 289 F.R.D.
555, 568 (N.D. Cal. 2013), and In re Restasis (Cyclosporine Ophthalmic Emulsion) Antitrust
Litigation, No. 1:18-md-02819-NG-LB (E.D.N.Y. filed Jan. 31, 2018). The views presented are
solely those of the authors.
1
The direct purchaser rule can be traced to a landmark Supreme Court decision, Hanover
Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968), where the Court held that
defendants may not use a “pass-on” defense against direct purchasers. Id. at 503–04. In 1977, the
Court applied and expanded the rule in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), holding
that, except in certain circumstances, only direct purchasers are “injured” within the meaning of
Section 4 of the Clayton Act in price-fixing cases—in other words, indirect purchasers lack
standing to sue for damages in federal antitrust cases. Id. at 730. The Court held that allowing
indirect purchasers standing to sue while prohibiting a “pass-on” defense for direct purchasers’
claims would create a risk of double recovery. Id. at 745–47. Accordingly, the Court held that the
State of Illinois, an indirect purchaser of concrete blocks, lacked standing to sue for antitrust
damages under federal antitrust law. Id. at 748.
2
Indirect purchasers are those that buy a good or service along the chain of distribution and
not directly from an antitrust violator.
3
The Supreme Court discussed two narrow exceptions to the direct purchaser rule: the “cost
plus exception” and the “control exception.” Illinois Brick, 431 U.S. at 736 & n.16. The “cost
plus” exception refers to actions that indirect purchasers might be able to bring when they were
parties to “cost plus” contracts. The term “cost plus” refers to agreements where the indirect
purchaser agrees to purchase a predetermined quantity of products at a fixed “cost,” “plus” a
markup. In these cases, the risk of duplicative recovery is low because the profit delta for the
341
342 A
NTITRUST
L
AW
J
OURNAL
[Vol. 84
This article suggests an alternative to eliminating the direct purchaser rule
as a whole. Our proposal involves distinguishing the two prongs of the rule
noted above. We support eliminating the first prong of the rule—that is, the
ban on indirect purchaser damages actions under federal antitrust law imposed
in Illinois Brick. But we argue for retaining the second prong—the rejection
of a “pass-on” defense set forth in Hanover Shoe.
The argument for overruling Illinois Brick while keeping Hanover Shoe
requires a bit of background. At first blush, it could seem that eliminating the
direct purchaser rule entirely would enhance private enforcement of federal
antitrust law. It would expand the group eligible to seek damages beyond
direct purchasers to include indirect purchasers. That might enable federal law
to compensate all the victims of antitrust violations, including indirect pur-
chasers in states without a state law remedy. It also might increase the law’s
deterrence effects—imposing liability for harm done not only to direct pur-
chasers but also to indirect purchasers. It might. But appearances can be
deceiving.
We contend that repealing the direct purchaser rule entirely in federal anti-
trust cases would diminish compensation and deterrence through private en-
forcement. A key reason is that developments in federal class certification
doctrine in recent decades have made obtaining relief on behalf of indirect
purchasers quite challenging. As a result, indirect purchaser classes tend to
recover damages in far fewer cases than direct purchaser classes, and in rela-
tively modest amounts. Eliminating both prongs of the direct purchaser rule
would make it more difficult—potentially much more difficult—to obtain
class certification in direct purchaser antitrust cases. Meanwhile, class actions
play a crucial role in private antitrust enforcement. It follows that shifting the
primary burden for antitrust enforcement from direct purchasers to indirect
purchasers would greatly reduce the deterrence effects of federal antitrust law
and likely would benefit antitrust violators far more than antitrust victims.
That would be unfortunate. The best theoretical work suggests that private
enforcement is valuable but does not adequately deter antitrust violations. An-
titrust violations occur far too frequently. Crime pays.
4
Repealing the entire
direct purchaser rule would make antitrust violations that much more profita-
ble and, presumably, that much more common.
seller regarding sales to the indirect purchaser remains constant. The Court also described cir-
cumstances where the indirect purchaser “controls” the direct purchaser as “[a]nother situation in
which market forces have been superseded and the pass-on defense might be permitted.” Id. at
736 n.16. In such a case, the entire overcharge is claimed by a single entity—the indirect pur-
chaser—thereby eliminating the risk of apportionment of damages between the direct and indi-
rect purchasers.
4
John M. Connor & Robert H. Lande, Cartels as Rational Business Strategy: Crime Pays, 34
C
ARDOZO
L. R
EV
. 427 (2012).
2022] R
EPEALING THE
D
IRECT
P
URCHASER
R
ULE
343
The alternative we support begins with recognizing that the direct purchaser
rule actually comprises at least two separate prongs. The Supreme Court
adopted one of them in Illinois Brick. The first prong provides that only direct
purchasers—not indirect purchasers—can obtain monetary damages under
federal antitrust law. Illinois Brick and the direct purchaser rule are at times
treated as synonymous. So, for example, state laws that allow indirect pur-
chaser damages actions are known as “Illinois Brick repealer” jurisdictions.
5
However, there is another prong of the direct purchaser rule that the Su-
preme Court established in Hanover Shoe. The second prong deprives defend-
ants of a pass-on defense in damages actions under federal antitrust law.
6
Direct purchasers can recover the full overcharges that they pay as a result of
an antitrust violation.
7
This is true regardless of whether direct purchasers are
able to mitigate their damages by passing on some of the overcharge to their
customers.
8
5
Some states give indirect purchasers standing under the state antitrust laws, i.e., Illinois
Brick “repealer” statutes. See Alabama (A
LA
. C
ODE
§ 6-5-60(a)); California (C
AL
. B
US
. & P
ROF
.
C
ODE
§ 16750(a)); District of Columbia (D.C. C
ODE
§ 28-4509(a)); Hawaii (H
AW
. R
EV
. S
TAT
.
§ 480-13(a)(1)); Illinois (740 I
LL
. C
OMP
. S
TAT
. 10/7(2)); Kansas (K
AN
. S
TAT
. A
NN
. § 50-
161(b)); Maine (M
E
. R
EV
. S
TAT
. A
NN
. tit. 10, § 1104(1)); Michigan (M
ICH
. C
OMP
. L
AWS
A
NN
.
§ 445.778(1)–(2)); Minnesota (M
INN
. S
TAT
. § 325D.57); Mississippi (M
ISS
. C
ODE
A
NN
. § 75-
21-9); Nebraska (N
EB
. R
EV
. S
TAT
. § 59-821); Nevada (N
EV
. R
EV
. S
TAT
. § 598A.210(2)); New
Mexico (N.M. S
TAT
. A
NN
. § 57-1-3(A)); New York (N.Y. G
EN
. B
US
. L
AW
§ 340(6)); North
Dakota (N.D. C
ENT
. C
ODE
§ 51-08.1-08(4)); Oregon (O
R
. R
EV
. S
TAT
. A
NN
. § 646.780(1)(a));
South Dakota (S.D. C
ODIFIED
L
AWS
§ 37-1-33); Vermont (V
T
. S
TAT
. A
NN
. tit. 9, § 2465(b));
West Virginia (W. V
A
. C
ODE
R. § 142-9-1(1.1)); Wisconsin (W
IS
. S
TAT
. § 133.18(1)(a)); see
also, e.g., Arizona (Bunker’s Glass Co. v. Pilkington, PLC, 75 P.3d 99, 102 (Ariz. 2003) (en
banc)); Iowa (Comes v. Microsoft Corp., 646 N.W.2d 440, 448 (Iowa 2002)); North Carolina
(Hyde v. Abbott Labs, Inc., 473 S.E.2d 680, 685 (N.C. Ct. App. 1996)); Tennessee (Freeman
Indus., LLC v. Eastman Chem. Co., 172 S.W.3d 512, 517 (Tenn. 2005)). Some states permit
indirect purchasers to bring cases under their consumer protection statutes or unfair trade prac-
tices statutes. For example, in Florida, indirect purchasers have standing to sue for antitrust
violations under Florida’s Deceptive and Unfair Trade Practices Act. E.g., Mack v. Bristol-My-
ers Squibb Co., 673 So. 2d 100, 110 (Fla. Dist. Ct. App. 1996). In Massachusetts, indirect pur-
chasers are permitted to bring cases under the Massachusetts Consumer Protection Act. E.g.,
Ciardi v. F. Hoffmann-La Roche, Ltd., 762 N.E.2d 303, 312 (Mass. 2002). In New Hampshire,
indirect purchasers have standing under New Hampshire’s Consumer Protection Act. E.g.,
LaChance v. U.S. Smokeless Tobacco Co., 931 A.2d 571, 580 (N.H. 2007).
6
In Hanover Shoe, the Supreme Court held that defendants cannot avoid antitrust liability by
using the pass-on defense, i.e., by claiming that direct purchasers suffered no injury as a result of
having “passed on” the anticompetitive overcharges to their customers. Hanover Shoe, 392 U.S.
at 488; see also id. at 489 (“We hold that the buyer is equally entitled to damages if he raises the
price for his own product. As long as the seller continues to charge the illegal price, he takes
from the buyer more than the law allows.”).
7
Id. at 491–94.
8
See id.;see also Amanda Kay Esquibel, The Rule of Avoidable Consequences in Antitrust
Cases: A Law and Economics Approach, 26 H
OFSTRA
L. R
EV
. 891, 899 n.56 (1998) (“In essence,
the Court decided that any principles of mitigation had to yield to what it perceived to be larger
issues of effective antitrust enforcement.”).
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