In the wake of the Supreme Court’s decision in Apple v. Pepper, we posed the following question to AAI Advisors Eric Cramer and Andrew Gavil. Their answers can be read below. For AAI staff’s analysis of the opinion, see Cracking Pepper: An Analysis of the Supreme Court’s Latest Pronouncement on the Indirect Purchaser Rule.
In Apple v. Pepper, the Supreme Court held that the Illinois Brick rule permits antitrust suits by the first purchaser from an alleged violator, even if the alleged violator is a distributor whose prices are partially set by upstream suppliers. Several State Attorneys’ General submitted an amicus brief urging the Court to overrule Illinois Brick, but other stakeholders cautioned that overruling this precedent could harm private enforcement. Both the majority and dissent believed the issue was not properly before the Court. Query after Pepper, is the indirect-purchaser rule likely to remain intact or is it likely to be reformed? If policymakers are contemplating changes to the rule, what are the key ingredients for successful reform to ensure adequate protections for indirect purchasers, direct purchasers, and others injured in the chain of distribution?
Eric L. Cramer, Chairman, Berger Montague PC
As to the first question, the so-called indirect purchaser rule is likely to remain intact. While none of the parties asked the Court in Apple to overturn Illinois Brick (or Hanover Shoe), neither the five Justice majority nor the four Justice dissent took the opportunity to criticize the existing framework. Justice Kavanaugh, writing for the majority, described the rule of Illinois Brick as flowing from “principles of proximate cause.” Slip Op. at 6. And he rightly recognized that the setting of such a “bright-line rule,” id. at, e.g., 5, 6, 7, 8, was “grounded on the ‘belief that simplified administration improves antitrust enforcement.’” Id. at 7 (quoting 2A Areeda, Hovenkamp, Blair, & Durrance, Antitrust Law para. 346e, p. 194 (4th ed. 2014)). The dissent, for its part, repeatedly praised Illinois Brick, concluding that “there is nothing arbitrary or unprincipled about . . . [its] rule or results. The notion that the causal chain must stop somewhere is an ancient and venerable one.” Slip Op. (dissent) at 10. So there does not seem to be a groundswell for revisiting Illinois Brick.
From my perspective as a lawyer who typically represents purchasers in antitrust class cases, that is a good thing for at least five reasons.
First, any effort to overturn Illinois Brick (which bars indirect purchasers from recovering overcharge damages) would inevitably involve the reversal of Hanover Shoe (which allows direct purchasers to recover 100% of the overcharge regardless of whether they pass on any of the harm and even if they suffer no net economic effects). The logic of both cases is the same: enforcement is improved if we apply the rules of proximate cause to rest all of the recoverable damages from the anticompetitive overcharge at the first step. The Supreme Court in Illinois Brick explicitly saw the two cases as inherently interconnected. The dissent in Apple did as well. Slip Op. (dissent) at 7 (“But the Court’s holding that Illinois Brick doesn’t govern this situation surely must mean Hanover Shoe doesn’t either”). We are kidding ourselves if we think that allowing indirect purchasers to recover wouldn’t also involve the undoing of Hanover Shoe.
Second, if we can only have one: 100% of the claim rests with the immediate buyer vs. the claim is dispersed down the distribution chain, I choose the former. Computing overcharges to the first purchasers is far simpler than conjuring an econometric model capable of tracing that harm down the chain of distribution to the end-purchasers. As with many things in life, simplicity is an underrated value. That is especially salient in antitrust cases where complexity lurks around every corner and plaintiffs bear the burden of proof. It is axiomatic that every additional quantum of complexity piled on the plaintiffs’ case weakens private enforcement.
Third, not only is modeling impact and damages to direct purchasers simpler under Hanover Shoe, but the necessary transactional data for such computations is typically available from the defendants in the case. Once the claimants get beyond the first level, however, obtaining reasonably comprehensive (or even representative) data tracing the sales from the manufacturer through a potentially dizzying array of non-parties, including original equipment manufacturers (if the product at issue is a component), resellers, and on down to consumers can often be a burdensome, time-consuming, expensive, and effectively impossible task.
Fourth, the success of private enforcement turns in large part on class certification, which (according to some courts) requires evidence capable of showing impact and computing damages across a class of purchasers. Making the required showing becomes far more difficult the more variables in play. The dissent in Apple highlights only some of the roadblocks courts will erect (and have erected) in front of parties attempting to trace harm through the chain of distribution, noting that consumers are injured “only if the developers are able and choose to pass on the overcharge to them,” Slip Op. (dissent) at 5, and highlighting other “pass on” related issues such as, e.g., how the defendant’s conduct affected “third-party pricing decisions,” id. at 5, apportionment of damages as between the various levels of the distribution chain, id., and the market power of the various third parties (to gauge the ability of such parties to pass on the overcharge). Id. at 6.
Further, for a class to be certified, all of these issues would need to be resolved with econometric modeling and evidence predominantly common to the class—an issue that the dissent anticipates with skepticism. Id. (dissent) at 6 (“. . . will the court then somehow extrapolate its findings to all of the tens of thousands of developers who sold apps through the App Store at different prices and times over the course of years?”). My point is not that it would be impossible to construct a class-wide model capable of making the necessary showings, separately, for a class (or classes) of indirect purchasers. It is instead three-fold: (i) the number of variables that need to be addressed explodes once the pass-on is a relevant factor, (ii) courts, spurred on by defendants, will force plaintiffs to address all of these issues with reliable class-wide evidence and available data simply to obtain class certification, and (iii) the more variables a plaintiff needs to address to prove impact and damages, the more difficult, time-consuming, expensive, and risky the case becomes. As risk and cost increase, case values plummet—and enforcement is inevitably hampered.
Fifth, because direct purchasers can recover 100% of the overcharge (before trebling), the total overcharge to the first level of the distribution chain often roughly approximates the total ill-gotten gains of the antitrust defendant(s). For the reasons just stated, the direct purchaser class has the best chance both of reliably computing its damages and of securing class certification. So, under the current rule, the claimant group with the best chance of succeeding typically has a claim that approximates recovery of all of the ill-gotten gains (though, obviously, as others have shown, for various reasons, recoveries in class cases rarely even approach that ideal result). Obviating that rule, and dispersing the claims down the chain of distribution, would inevitably result in lower overall recoveries for a variety of reasons, including those stated above about the relative weakness of the indirect purchaser claims as well as the practical difficulty of securing the necessary data.
But these indirect claims would be less valuable (or non-existent) for two additional, albeit related, reasons: (i) for many cases involving product components, there would be no end-consumers with cognizable claims, and (ii) absent the direct purchaser rule of Hanover Shoe, resellers would have individualized “lost profits” claims, which are not susceptible to class treatment. As to the former, in many component cases, where a price-fixed product is a small integrated part of a final manufactured product, it is practically impossible both to trace the overcharge on the component down to the end-consumer, as well as to come up with an econometric model capable of showing harm to the vast majority of purchasers of the end product. As to the latter, if the direct purchaser rule of Hanover Shoe is eliminated, then it is likely that the damages of all reselling middlemen in the chain of distribution would be measured by the normal “net economic harm” standard, which is typically highly individualized and thus not susceptible to class treatment.
As a result, most if not all of the damages absorbed by purchasers other than end-consumers would effectively be without a remedy. To see how these two issues work to degrade private enforcement, take price-fixing of capacitors, which are small low-priced components of electronic equipment and products. Eliminate the direct purchaser rule, and direct purchasers have weak claims both because they may pass on some of the overcharge, and also because, absent Hanover Shoe, their damages would likely measured by their “lost profits,” which claims are not susceptible to class treatment. What about the rest of the distribution chain? Well, Apple buys capacitors (for a few cents) and puts them into $800 iPhones, and GM parts suppliers buy capacitors for parts that GM puts in cars. The likelihood of iPhone consumers or Chevy buyers showing overcharges due to price-fixed capacitors in their iPhone or cars, let alone harm on a class-wide basis, approaches zero.
To be sure, some indirect purchasers have viable claims for some portion of capacitor sales, but that would by no means cover all of the harm inflicted by an alleged cartel. Thus, we would go from a system in which the total recoverable damages are roughly equivalent to the ill-gotten gains, to one in which much of the harm is, for all practical purposes, without a remedy and those claimants with a remedy have more difficult claims.
In short, my message to well-meaning antitrust reformers seeking to provide claims to injured indirect consumers is as follows: the current system of providing 100% relief to direct purchasers and none to indirect buyers has its flaws, but the most likely alternatives are far worse.
 Illinois Brick Co. v. State of Illinois, 97 S. Ct. 2061, 2066 (1977) (characterizing the issue before the Court as “whether the offensive use of pass-on authorized by the decision below is consistent with Hanover Shoe’s restrictions on the defensive use of pass-on,” and holding “that it is not,” given that “whatever rule is to be adopted regarding pass-on in antitrust damages actions, it must apply equally to plaintiffs and defendants,” and stating that “[b]ecause Hanover Shoe would bar petitioners from using respondents’ pass-on theory as a defense to a treble-damages suit by the direct purchasers (the masonry contractors), we are faced with the choice of overruling (or narrowly limiting) Hanover Shoe or of applying it to bar respondents’ attempt to use this pass-on theory offensively”); see also id. at 2070 (“We are left, then, with two alternatives: either we must overrule Hanover Shoe (or at least narrowly confine it to its facts), or we must preclude respondents from seeking to recover on their pass-on theory. We choose the latter course.”).
Andrew I. Gavil, Professor of Law, Howard University School of Law
In June 1979, the Supreme Court memorably declared that “Congress designed the Sherman Act as a ‘consumer welfare prescription.’” It did so in Reiter v. Sonotone, a case brought as a putative class action on behalf of retail purchasers of hearing aids who alleged that five hearing aid manufacturers had conspired together to engage in both horizontal and vertical price fixing. The facts were clear: the consumers had purchased their hearing aids from independent retailers, not directly from the manufacturers.
The issue before the Court, however, was not whether the overcharged consumers were direct or indirect purchasers, but whether they were injured in their “business or property” as is required by Section 4 of the Clayton Act. The Court concluded that they were. Although Illinois Brick is referenced in a footnote, the Court declined to consider its application to the case, because the issue had not been addressed in the lower courts.
The Court’s analysis in Reiter began with the text of Section 4, emphasizing its first two words: “any person.” Quoting from Pfizer Inc. v. Government of India, which in turn relied on Mandeville Island Farms, Inc. v. American Crystal Sugar Co., the Court observed:
‘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.’. . . . And the legislative history of the Sherman Act demonstrates that Congress used the phrase ‘any person’ intending it to have its naturally broad and inclusive meaning. There was no mention in the floor debates of any more restrictive definition.
The Court later added that “the leading proponents of the legislation perceived the treble damages remedy . . . as a means of protecting consumers from overcharges resulting from price-fixing” and “[a]t no time [in the legislative debates] . . . was the right of a consumer to bring an action for damages questioned.”
In retrospect, Reiter seems anomalous. Only two years earlier, the Court had, in Illinois Brick, seemingly ignored this unambiguous statutory text and legislative history to reach a result that was widely perceived as anti-consumer: prohibiting suits for damages by indirect purchasers, who are often consumers at the end of a distribution chain. It was this perception that Illinois Brick was anti-consumer that led so many states to adopt their own broader private rights of action, which allowed indirect purchasers to sue for damages as a matter of state antitrust law.
Forty years later, and after a string of decisions largely expanding the reach of Illinois Brick, Apple v. Pepper seems to have come full circle – at least thematically – to some of the reasoning that propelled the Court in Reiter. In reaching its conclusion that iPhone users are direct purchasers from Apple’s App Store, not indirect purchasers from App Developers barred from seeking damages by Illinois Brick, like Reiter, the Apple majority starts with the unqualified text of Section 4. And, like Reiter, it lauds the compensation goals of the private right of action:
Leaving consumers at the mercy of monopolistic retailers simply because upstream suppliers could also sue the retailers makes little sense and would directly contradict the longstanding goal of effective private enforcement and consumer protection in antitrust cases.
And it concludes by proclaiming that “‘protecting consumers from monopoly prices’ has been ‘the central concern of antitrust’” since 1890.
Apple v. Pepper also echoes the warnings voiced by Justice Byron White and the dissenters in Kansas v. UtiliCorp United, Inc. in 1990. Justice White, who had written the majority opinions for the Court in both Hanover Shoe and Illinois Brick, refused to join the majority in UtiliCorp, which further extended Illinois Brick. He cautioned that Illinois Brick “did not hold that, in all circumstances, indirect purchasers lack § 4 standing.” As had the Court in Reiter, he observed that the “plain language” of Section 4 “reflects an expansive remedial purpose” and that “Congress sought to ensure that victims of anticompetitive conduct receive compensation.” Illinois Brick, in short, should not be thoughtlessly extended to factually distinguishable cases that did not similarly pose the concerns that animated Illinois Brick.
Apple v. Pepper resonates with the UtiliCorp dissent, too, when it states that “Illinois Brick is not a get-out-of court-free card for monopolistic retailers to play any time that a damages calculation becomes complicated.” Its synthesis of Reiter and the UtiliCorp dissent, therefore, could be interpreted as an invitation to advocates who would like to see Illinois Brick overruled. But that would likely be an overreaction. It is more likely that Apple signals only that courts should be more circumspect in responding to calls for rote application and extension of Illinois Brick.
Those who hope the Court is now poised to overrule Illinois Brick, may, therefore, be disappointed. After forty years, judicial abandonment of Illinois Brick would be no simple matter. The private right of action in Section 4 was designed to be and remains an essential supplement to public enforcement of the antitrust laws. Collectively, this combination of public and private enforcement rights, together with the provisions of Sections 4 and 16 of the Clayton Act, create a system of enforcement designed to provide deterrence, compensation, and remediation.
Striking the balance among these three goals has been a difficult challenge – and Illinois Brick is now a critical component of that balance. An entire eco-system has grown up around it, mediating the interests of direct and indirect purchasers, state and federal courts, and antitrust defendants. Moreover, the antitrust law and enforcement norms of 2019 are not the same as they were in 1977. Today’s private antitrust plaintiffs, especially those in federal courts, face a gauntlet in the form of more aggressive motion practice, elevated standards for class certification, and perhaps most importantly far more demanding burdens of pleading, production, and proof.
On the other hand, the state of economic learning and the technology available to model damages far exceeds that which was available in 1977, likely reducing if not eliminating Illinois Brick’s concerns about complex damage apportionment and duplicative damage recovery. Reform, today, therefore, might well be warranted, but it would entail a major system re-calibration. No single case is likely to present the Court with all of the information it would need to revisit Illinois Brick and Hanover Shoe. That leaves Congress, not the Court, to address any continued concerns.