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ANTITRUST LAW: RIGHT OF INDIRECT PURCHASERS TO SUE FOR INJURIES

HINI BRIEF NUMBER HB78203

AUTHOR :
Cohen , Hen ry

American Law Division A

THE LIBRARY OF CONGRESS
CONGRESSIONAL RESEARCH SERVICE

MAJOR ISSUES SYSTEM

DAEIE ORIGINATED Qggggzg
DATE UPDATED Q_5_4g1g§g

FOR ADDITIONAL INFORMATION CALL 287-5700

05 01

cns- 1 ua732o3 UPDATE-05/01/80

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The United States Supreme Court, in ]_Zl_1._'_i;1_<_);'._§__B_;_i_.g_lg__CQ. v. I__]__.l__igQi_s_, 431

U.S. 720 (1977), held that if an individual or corporation violates the 

antitrust laws and sells its product at;a higher price as the result of so
doing, damages may be recovered only by persons, who purchased the‘ product
directly from the violator. For example, if a manufacturer engages in price
fixing and charges a retailer an illegally inflated price for merchandise,
and theretailer includes the overcharge in the amount he charges consumers,
then only the retailer -— not the consumers - may sue the manufacturer for
damages. ysimilarly, a.State attorney general suing as pg;gg§_ pgtgiae on
behalf of consumers umder the Hart-Scott-°Rodino Antritrust Improvements Act
of 1976 will also probably be precluded.frtn recovering damages for illegal
overcharges, unless the consumers it represents purchased directly from the
antitrust law violator.

§A§§§§QQ!.-

Section 4 of the Clayton Act, 15 U.S.C. 15, provides that "any person who
shall be injured in his business or property by reason of anything forbidden
in the antitrust laws may sue therefore...and shall recover threefold the
damages by him sustained, and the cost of the suit, including a reasonable
7 torney's fee." 15 U.S.C.. 15a gives the right to sue for antitrust damages
Lu the United States, and '15 U.S.C. 15c, enacted as Title III of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, gives  it tot State
attorneys general acting as pg§gn§_pgt;§ag on behalf of citizens of their
5 tates . 1 .

In 11a.I;9!.e2r-.SL1.2e...I;1.s- v- f_I11..i_t.e§..§11.2.<2_.IfI..e1.s.=.h.i..I;.<2r1-Q2r2 -. 392 8-5. 481 (1968) .
a direct purchaser had sued a manufacturer for price fixing and the
manufacturer had argued in its defense that the direct purchaser had not been
injured because it had.passed on the illegal overcharges to its customers.
The Supreme Court rejected this defensive use of the “pass-on" theory and
held that direct purchasers could sue for antitrust damages xdespite their
having passed on the higher costs. In ;lligQ;§_§;ig5_ Qggpggy v. Illingis,
H31 U.S. 720 (1977), the State of Illinois sued manufacturers of concrete
blocks for price fixing. The manufacturers.had sold the blocks to middlemen
who had in turn sold them to the State, which alleged in its suit that the

»price fixing had resulted in higher prices for the middlemen, which had been

passed on to the State (Illinois was thus suing for injury to itself, not as
pgrgg§_pgt;;gg on behalf of its citizens). The Supreme Court disallowed the
suit, holding that suits under section 4 of the Clayton Act may be brought
only by direct purchasers, not by  buyers farther down the chain of
distribution. The Court reasoned that to be consistent with §§g9ye;_§hgg, in
which it had rejected the defensive use<of pass-on, it had to also reject the
offensive use of the theory. In other words, if a direct purchaser could

arecover despite having passed on its damages, an  indirect purchaser should .1
7 t be permitted to recover damages resulting from the pass—on. To allow

Luth direct and indirect purchasers to recover "would create a serious risk
of multiple liability for defendants" and "would add whole new dimensions of
complexity to treble-damage suits  and could seriously undermine their
effectiveness.” t 1

On the other hand, it could be argued that the decision will seriouslyvl“

cns—- 2 H3782 03 menus-05/01/so

undermine the effectiveness of the antitrust laws because, as Justice Brennan
1 ;ed in his dissent, "Injured consumers- are precluded from recovering
damages from manufacturers, and direct purchasers who act as middlemen have
little incentive to sue suppliers so lcng as they may pass on the bulk of the
illegal overcharges to the ultimate consumers.“ Justice Brennan added that,
as a practica1;matter, existing procedural mechanisms can eliminate the
danger of duplicative recovery in most instances. In addition, the decision
has been said to render "virtually meaningless" Title III of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, which grants to State
attorneys general the authority to sue as pg;gg§_pg§;;§§ on behalf of the
State's citizens for violations of the Sherman Act, such as price fixing;
Price fixing may result in higher prices on. a mass-produced item, thereby
injuring possibly millions of consumers, each in a relatively small amount-
without pg_1;gg§__p_at_1_-i._a_g actions, the chances of consumers seeking compensation
for their injuries, either in individual or class actions, would be remote,
even if they could sue as indirect purchasers. The Hart-Scott-Rodino Act was
thus intended to increase the likelihood of prosecution, and thereby

deterrence, of such violations. One commentary has suggested that the fact

that ;;;;nQi§_ ggiggs did not involve an A interpretation of the
Hart-Scott-Rodino Act nightibe seized upon by some courts determined "not to
permit emasculation of the Antitrust Improvements Act....“ However, the
commentary concedes nthat pa;gn§_ paggiag “may not be able to survive
evenhanded application of the pass-on rule under =Illinois Brick" (Antitrust
and Trade Regulation Report, v. 822, July 1a, 1977, p. 3-7).  

Support for legislation to overturn ;l;;nQi§_ grigt reportedly has been
< pressed by the White House, the Justice Department, the Federal Trade
Commission, the 50 State attorneys general, the National League of Cities,
the National Conference of state Legislatures, and the National Association
of Counties. The United States Chamber of‘ Commerce, on the other hand;
released an analysis critical of legislation to overturn the decision. In
the 95th Congress, the Senate and House Judiciary Committees reported bills
(5. 187u/H.R. 119u2) that would have overruled both ;;liggi§_ ggigg and
ggn9yg;_§hgg to permit offensive and defensive use of pass—on. This would
have reversed the current state of the law so that only parties that, could
prove actual injury ——-usually indirect.purchasers -- could recover. A

overruling §ggQygg_§h9g, it was argued at hearings on S. 187fl,« could be
detrimental to consumers because "the vast majority of ‘price-fixing actions
are brought by direct purchasers." Relying on indirect purchasers to sue
could weaken antitrust enforcement because of difficulties with class action
procedures. Direct purchasers are arguably more likely to be aware of
antitrust violations and would have the incentive to su because the Clayton
Act provides for treble-damages. V A

Direct purchasers, on the other hand, may fail to sue in many instances
because they fear retaliation from price-fixers. It is possible, it  was

iargued, to overrule only ;llingi§_§gigg and.permit both direct and. indirect

purchasers to sue; the chances of double recovery may be more theoretical
than real. 9 ’

In the 96th Congress, on Jan. 31, 1979, Sen- Kennedy introduced 5. 300,
the Antitrust Enforcement Act of 1979, and on Feb. 8, 1979, Rep. Rodino
introduced an identical bill, H.R. 2060. This bill would allow direct and
indirect purchasers to recower their damages, but it would permit the pass-on
defense to the extent necessary to avoid duplicative recovery. Thus, the
bill would overrule I;;;g9i§_§;ig§ and would partially overrule gagQyg;_§hgg.

(The overruling of gagowe; Shgg wouldl be  partial in that,o if a direct

cns- 3 HB78203 UPDATE-O5/01/80

purchaser passed on inflated prices and the court found that the indirect
p ‘chasers who were injured.were unlikely to sue, then there would be no

danger of duplicative arecovery* and the pass-on defense would‘ not beg

permitted).

S. 300 also allows indirect sellers who have been unerpayed to sue and
permits the pass-on defense against direct sellers when  necessary to  avoid
duplicative liability. These provisions contemplate the type of situation in
which large supermarkets, for example, agree to underpay, middlemen who, in
turn, underpay farmers. ‘     A

S. 300 would permit proof of injury and amount of damage on a classwidei

basis, "without requiring proof of such.matters by each individual nember.P
Total damages, however, could be no more than the sum of the  percentages- of

total damages attributable to individual class members, except in parensl

patriae actions, in which recovery of damages suffered by all consuners is
permitted by 15 U.S.C. 15(d).’ 9 m

Section 3 of the bill would pernit.the Judicial Panel. of yuultidistrict

Litigation to consolidate for both pretrial and trial any mantitrust  action,
instead of just parens patriae actions as currently provided by 28 U.S.C.

v1407(h). w

9 S. 300 would apply to suits pending on the date of its enactment.

pH.R. 2204, introduced by Rep. Hcclory on Feb. ~15,. 1979, would overrule

b ‘-11 1.t.l.l..=;n2i§.§:.:1.21s and §eI.1.2zer.§.ho..e-

on May 8, 1979, the Senate Judiciary Committee reported 5. 300 with ynajor
revisions. The bill would continue to permit indirect purchasers to sue, but
would permit the pass-on defense against direct purchasers in all cases, thus

  overruling gangygg_§h9g. The reported bil1.onits the provision dealing with

proof of injury and amount of damages in sclass action cases  and adds a
provision allowing courts to award attorneys‘ fees to prevailing defendants
upon a finding that the plaintiff acted in bad faith, vexatiously, wantonly,
or for oppressive reasons. It also adds a provision that. restricts foreign

tgovernnents to recovery of single danages in suits brought under section uvof

the Clayton Act and those only if the laws of the foreign‘ government forbid
the type of conduct.on which it bases its action and pernit the United States
to recover damages  caused by such conduct. This last provision would

aoverrule Pfigg;‘_;ng: v. §ggg§nngnt_;ng;g, 43% U.S. 308 (1978), in which the

Suprene Codrt held that foreign governments may, like other plaintiffs,
recover treble damages- 9 w   9

L§§l§LA2lQ§

s. 300 (Kennedy) /3.3. 2060 (Rodino)

Amends the Clayton Act to allow both direct and indirectupurchasers‘ and

. esellers to recover damages, but pernits the passéon ndefensev to the, extent
ianecessary to avoid duplicative recovery. H.R. 2060 introduced Feb. 8, 1979:
in r ferred to Committee oni thei Judiciary. isubcommittee on monopolies zand
Ceamercial Lawheld hearings Peb._27, bar. 7. Clean bill forwarded to full

9 Conmittee by Subcommittee in lieu, Sept. 18, 1979. S. 3009 introduced tJan.

31, 1979; preferred to Committee on the vJudiciary. on ‘Hay" 8,  1979, the 

senate Judiciary Committee reported 5. 300 with major  revisions,  including
allowing the pass-on defense in all cases and liniting foreign governments to
single damages in actions brought under section 4 of the Clayton Act.  

cns- 4 213732 03 upnmz-.0 5/0 1/30

H.R. 2204 (ucclory) .

Amends the Clayton Act to allow both direct and indirect purchasers and
sellers to recover. damages, but permits use of the pass-on defenses.
Introduced Feb. 15, 1979; referred to Committee on the Judiciary. Hearings
held liar. 7 and Apr. 10, 1979.  

1i§R........RIN§,§
0.5. Congress. House. Committee on International Relations.
subcommittee on International Economic Policy and Trade.
Clayton Act Amendments of 1978. Hearings, 95th Congress,
2d session, on 11.11. 119112. Aug. 3, 1978. [Not yet printed]

0.5. Congress. House. Committee an the Judiciary. Subcommittee
on monopolies and Commercial Law. Effective enforcement
on the antitrust laws. Hearings, 95th Congress, 1st session,
on H.R. 8359. Sept- 9, 16; and Oct. 6, and 20, 1977.
Washington, 0.5. Govt. Print. Off., 1977. 511 p.

-——-- Hearings, 96th Congress, 1st session, on H.R. 2060. Feb. 27
and Mar. 7, 1979. [Not yet published];

0.5. Congress. Senate. Committee on the Judiciary. Effective
enforcement of the antitrust laws. Hearings, 96th Congress,
1st session. [Not yet published] 1 ~

Hearings held on Feb. 1, and Mar. 8, 1a, and 19, 19‘79.

0.5. Congress. - Senate. Committee on the Judiciary- Subcommittee
on Antitrust and Monopoly. ; Fair and effective enforcement
of the antitrust laws. Hearings, , 95th Congress, 1st sessim,
on 5. 1870. July 21, 22, and Sept. 9, 1977. Washington,
0.5. Govt. Print. Off., 1977. 308 p.
Additional hearings held Apr. 7, 17, 21, 214, and 26, 1978.

0.5. Congress. House. Committee on International Relations.
Clayton Act Amendments of 1978; report to accompany
H.R. 11942, together with supplemental and additional views.
Washington, 0.5. Govt. Print. Off., 1978. 16 p. (95th Congress,
2d session. House. Reportno. 95-1397, Part II) '

0.5. Congress. 7 House. 7 Committee on the Judiciary. Clayton
Act Anendnents of 1978; report to accompany H.R.   119112,
together with additional, dissentingand minority views.
Washington,0.S. Govt. Print. Off., 1978. 66 p. (95th
Congress,2d session. House. Report no. 95-1397, Part 1)

0.5. Congress. Senate. Committee on the ‘Judiciary. Antitrust
Enforcenent Act of 1978; 1 report to accompany 5 . 187I4.
Part I -- majority views. June 111, 1978. Washington,
0.5. Govt- Print. Off., 1978. 56 p. (95th Congress,
2d session. Senate. 5 ‘Report no. 95-934. Part 1)

--------¥ Antitrust Enforcement Act of 1979;report to accompany 5. 300.

CRS- 5 HB78203 UPDATE-05/01/80

July 10, 1979. Washington, 0.5. Govt. Print. Off., 1979.
(96th Congress, 1st session. Senate. Report no. 96-239)

----- Antitrust Enforcement Act of 1978; report to accompany
S. 18711. Part II -- minority views. June 14, 1978.
Washington, U.S. Govt. Print. off., 1978. 117 p.

(95th Congress, 2d session. Senate. Report no. 95-934.
Part 2) 1

A22.;'!I..Q.b.'.AI-.-.P;.E1£§¥1§..1l§.__§Q£.'§.C.§.§
Antitrust law--private actions: The Supreme Court bars treble-damage
suits by indirect purchasers. North Carolina Law review
v. 56, p. 3131 (1977).

Bureau of National Affairs. Antitrust and trade regulation
report no. 822 (1977) , p- B-1; no. 831 (1977), p. F-ll.

Kinter. The Hart-Scott-Rodino Antitrust Improvements Act of
1976: An analysis. George Washington law review, v. 46,
p- 1 (1977).

Recovery by indirect purchasers. Harvard law review, v. 91,
p. 221 (1977).

Recovery by indirect purchasers and the functions of antitrust
treble damages. Texas law review, v. 55,1p. 1M5 (1977) .

Scaling the Illinois brick wall: The future of indirect .
purchasers in antitrust litigation. Cornell law review,
v. 53, p. 309 (1978). 1

0.5. Library of Congress. Congressional Research Service-
Antitrust law: Standing of consuners to sue fa: damages
(Reiter v. Sonotone Corp .) [by] Henry Cohen. (regularly
updated) 1 9

Issue Brief 79214

----—— some judicial means of citizen redress: class actions,
parens patriae actions, multidistrict litigation, citizen
suits,gui tan actions [by] Henry Cohen. Washington,
July 1978. 55 p. A

uultilith 78-1llllA A

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