AAI sat down recently with Joshua Davis, Professor, Director of the Center for Law and Ethics, and Dean’s Scholar, University of San Francisco School of Law (USF Law). Professor Davis is also a long-time AAI Senior Fellow. We asked him to provide some context around the new commentary by AAI and USF Law, The Vital Role of Private Antitrust Enforcement in the U.S. The commentary provides analysis and interpretation of the statistics on private antitrust enforcement in the 2018 Antitrust Annual Report: Class Action Filings in Federal Court, produced by Huntington National Bank and USF Law. The results are revealing and reinforce the vital role of private antitrust enforcement.
What piqued your interest in co-authoring an empirical study of private antitrust class actions?
I have been studying private antitrust class actions for many years. New research tools using artificial intelligence through Lex Machina have made an empirical analysis possible. That opportunity is very exciting.
Before we address some of your findings, please tell me a bit about antitrust enforcement in general in the U.S. How are the antitrust laws enforced?
The antitrust laws can be enforced in two main ways. First, there is government enforcement. Both federal and state government can prosecute antitrust violations. They can pursue criminal or civil sanctions. Second, there is private enforcement. Various private actors can bring actions to obtain damages and potentially injunctive relief.
Does private litigation play an important role in antitrust enforcement in the U.S.?
It does. It provides the victims of antitrust violations their only meaningful opportunity for compensation. I have also done an analysis with Professor Robert Lande showing that private financial recoveries may have a greater deterrent effect than government prosecution of illegal antitrust cartels.
Why does private enforcement play such a crucial role in deterring antitrust violations?
One reason is that government enforcement agencies tend to be highly averse to risk. They tend not to be bring legal actions unless they are all but certain to prevail. That leaves a great deal of room for anti-competitive conduct to go unaddressed. Private plaintiffs and their counsel are willing to take somewhat greater chances.
Is the reliance on private antitrust enforcement in the U.S. unusual? Do other countries have a similar system?
The U.S. is unusual in relying so heavily on private antitrust enforcement. On the other hand, private enforcement is growing outside of the U.S. Other countries are copying our model, at least to some extent.
Why has the U.S. relied more heavily on private antitrust enforcement than other countries?
The answer is not entirely clear but there are at least a couple of likely reasons. First, the U.S. tends to be enamored with the free market. Private antitrust enforcement creates a free market solution to a free market problem. Private lawyers—playing the role of private attorneys general—enforce the antitrust laws. Second, Professor Sean Farhang has argued that private enforcement is caused in part by the structure of our government. When one party is in control of Congress and the other party is in control of the Executive, Congress can create private rights of action to make sure laws get enforced. So, for example, if the Democrats controlled Congress today and passed a new antitrust law, they might not trust the current administration to enforce it. Private enforcement would likely appeal to them, even though it would put in place an enduring system to deal with a temporary challenge. Farhang shows a historical pattern along these lines in the U.S. Parliamentarian governments are not divided in the same way.
What role do class actions play in private enforcement?
Class actions are the main mechanism for private enforcement of the antitrust laws. Professor Lande and I have studied over sixty instances of successful private enforcement of the antitrust laws through litigation. Class actions play a crucial part.
Who can sue for damages under the antitrust laws?
Under federal antitrust law, only so-called “direct purchasers” can seek damages. So, for example, if a group of manufacturers of electrical components get together and fix their prices, only the businesses that make purchases directly from the conspirators can seek money damages under federal antitrust law. On the other hand, most states allow “indirect purchasers” to seek damages. So, in the same example, the end purchasers of the electrical devices containing the components can seek damages under state antitrust laws.
What have been the criticisms of private antitrust enforcement?
Oddly, critics of private enforcement make two criticisms, even though there is a great tension between them: that private enforcement results in defendants paying too much in damages and too little in damages. The first criticism is based on the notion that private plaintiffs bring meritless cases and nonetheless recover. The second criticism is based on the notion that plaintiffs settle meritorious cases for recoveries that are too small.
Do you find these criticisms persuasive?
No, not really. Theory and the available evidence suggest that they are not correct. Private plaintiffs and their attorneys have little incentive to bring meritless cases. They risk spending a lot of money and recovering nothing in return. Truly weak cases are likely to be inadvertent and relatively rare. Further, the recoveries plaintiffs obtain—often tens or even hundreds of millions of dollars—are too large to explain away as nuisance lawsuits. On the other hand, private plaintiffs have cumulatively recovered billions of dollars. Those sums are large enough to have significant deterrence effects. Various scholars have studied these issues—Professor Lande, Professor Connor, and I among them—and have concluded that private antitrust enforcement is significant and valuable but insufficient. So antitrust violations persist at too high a rate. Crime pays.
What are the threats to private antitrust enforcement?
There are various threats to private antitrust enforcement. Courts have made it harder for plaintiffs to survive motions to dismiss and for summary judgment. Courts have also ratcheted up the standard at class certification. And the Supreme Court has required lower courts virtually always to enforce pre-dispute mandatory arbitration clauses, and made it very hard to pursue classwide arbitration. As a result, often plaintiffs have no meaningful way to enforce their private rights under the antitrust laws, no matter how strong their claims are on the merits.
What is the consequence of these threats?
The consequence is that our free market often isn’t really free. It is skewed to benefit large corporations. Small and medium sized businesses pay much higher prices than they would in a more competitive market. So do consumers. There is also likely less innovation than there would otherwise be. And these changes apply to all litigation. So foreign companies are able to prey on American businesses and consumers and our courts do a poor job of protecting them.
What does the study and the commentary you co-authored with AAI show about private antitrust enforcement?
It provides valuable, empirical confirmation of a lot of these points. There is no question that private enforcement is meaningful—it recovered over $19 billion in the six years studied. The study also shows that plaintiffs recovered many tens or hundreds of millions of dollars in many cases—amounts too large to be explained away as nuisance lawsuits.
What about the risk you mentioned of foreign companies preying on American companies and consumers through anti-competitive practices?
Both the empirical evidence and the case studies in the commentary show foreign companies have engaged in antitrust violations that harmed U.S. businesses and consumers. Given the difficulties of pursuing successful antitrust class actions, we know that the recoveries were likely significantly less than the actual harm caused. That provides one explanation for why the wrongdoers engaged in the illegal conduct. Sadly, unless we strengthen private enforcement, the reality is that crime will continue to pay—and we will continue to see large numbers of antitrust violations in the future.
Do you plan to continue to monitor private antitrust class action settlements in the future?
We do. Now that we have a baseline of data, we have identified certain important trends that support the vital role of private enforcement, and the antitrust class action, in particular. We hope to be able to monitor those trends, and others, as more data becomes available. That should be useful to scholars, courts, government enforcers, and private attorneys.
How so? Can you provide any examples?
Yes. Courts may be interested in our data about which private firms are most active and successful. That can be useful in selecting class counsel. Similarly, the study shows that in all but the largest cases courts tend to award about 30% of any private recovery in attorney’s fees—another useful source of guidance to courts. The information may also be useful for clients in selecting defense firms. In time, as we accumulate more data, plaintiffs’ firms and funders may also be able to use the data to predict which cases are likely to be successful. That can help in planning. And Congress may decide that it is tired of U.S. courts using mandatory arbitration to deprive antitrust victims of their rights and of foreign antitrust violators of preying on U.S. businesses and consumers. Perhaps it will pass new legislation. No doubt there are many other uses for the underlying study and the commentary.