Coordinating private class action and public agency enforcement of antitrust law

Journal of Competition Law and Economics

Volumn 2, Issue 2, 2006, Pages 159-187

  Rosenberg, David ^a   Sullivan, James P ^b  

^a HARVARD LAW SCHOOL   (United States)

^b Department of International Practice   (United States)

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[No Author keywords available]

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EID: 33746097013     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhl007     Document Type: Article

References (88)

1. Richard A. Posner, Antitrust Law, 2nd edn (Chicago: University of Chicago Press, 2001) at 266 (second emphasis added).
2. The basic federal antitrust law comprises the Sherman Act, 15 U.S.C. § 1 et seq. enacted in 1890; the Clayton Act, 15 U.S.C. § 12 et seq. enacted in 1911 and the Federal Trade Commission Act, 15 U.S.C. § 41 et seq. enacted in 1911. In distinguishing between "public" and "private" enforcers we focus on the salient functional features of the source of enforcement funds and the situs of discretion over the scale, scope, and intensity of enforcement investment and effort. In particular, public enforcers generally rely on public tax and other sources of funding and lodge prosecutorial discretion in government agents. Private enforcers tap private sources of financing civil litigation and determine the scale, scope, and intensity of their enforcement investment and effort based on rational choice of the most profitable course of action.
3. See Stephen Calkins, "An Enforcement Official's Reflections on Antitrust Class Actions" (1997) 39 Ariz. L. Rev. 413 at 440. The FTC is the exclusive enforcer of the provisions of the Federal Trade Commission Act and primarily pursues injunctive remedies. The DOJ is authorized to seek penalties of imprisonment and fines, and also injunctive remedies. The remedial options available to private enforcers include injunctive relief and divestiture as well as treble damages. As Posner points out, policy makers and commentators typically err by analyzing the public and private components of the amalgamated antitrust enforcement mechanism (Posner, supra n. 1 at 47). The error is to evaluate each component separately. Rather, the enforcement mechanism must be judged and designed in the aggregate. The performance of any system of law enforcement must be considered and shaped functionally according to the way its operation will and properly should affect the behavior of enforcement targets. In particular, firms "aggregate the expected punishments and discount (multiply) them by the probability of their imposition to determine the expected punishment," ibid. It follows that the effectiveness of the antitrust legal regime must be judged and reformed from an aggregate perspective; that is, in terms of how all of the various public and private pieces can be fit and operated together to achieve the optimal joint level of enforcement.
4. These conditions can also, by design or effect, produce excessive public enforcement. High-profile prosecutions, especially those that may capture public attention or pander to its fears, can lead to higher budgets and enlarged jurisdiction, promotions within bureaucratic ranks, and political, judicial, and private-sector career opportunities. See generally Daryl J. Levinson, "Empire-Building Government in Constitutional Law" (2005) 118 Harv. L. Rev. 915. While our proposal does not directly address the coordination problem of overzealous public enforcement, it will, as we note in concluding remarks, likely have a salutary effect on incentives for such personal and bureaucratic "empire-building."
5. See Thomas E. Kauper & Edward A. Snyder, "An Inquiry into the Efficiency of Private Antitrust Enforcement: Follow-on and Independently Initiated Cases Compared" (1986) 74 Geo. L.J. 1163.
6. The problematic nature of follow-on class actions results in part from the fact that private enforcers often benefit from the presumption, established by section 5(a) of the Clayton Act, that mandates treating a final criminal or civil judgment obtained by the United States as "prima facie evidence" against the same defendant in a private civil action. In recent years, private enforcers have also been able to invoke offensive collateral estoppel against such a defendant. Compare Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322 (1979). Of course, courts could exert some useful control over unnecessary follow-on class actions by adjusting class counsel fees to reflect the actual social value added by the litigation effort. However, as a practical matter, courts lack the resources needed to carry out this function effectively. The high cost of providing them with relevant information includes determining the optimal investment class counsel should make in relation to the optimal investment the public enforcer should make and did make.
7. The leniency program used by DOJ to police international cartels is described by the Director of Criminal Enforcement, Antitrust Division, in Scott D. Hammond, "Detecting and Deterring Cartel Activity through an Effective Leniency Program" (paper presented to the International Workshop on Cartels, November 2000), online: United States Department of justice, http://www.usdoj.gov/atr/public/speeches/9928.pdf.
8. See, e.g., Posner, supra n. 1 at 274-275.
9. Ibid. at 280-283.
10. Jill E. Fisch, "Class Action Reform, Qui Tam, and the Role of the Plaintiff" (1997) 60 Law & Contemp. Probs. 167.
11. The qui tam approach enables public enforcers to supplement private investment that falls short of the level required for socially optimal enforcement of the class action claim. Our proposal would also provide the means for public supplementation of private investment. In any event, public enforcers already have the option of offering financial and other assistance with no strings attached to private enforcers of class actions, and doubtless in many cases the offer would be accepted.
12. To be sure, changing the substantive standards defining illegal monopolistic conduct or the enforcement mechanism that incorporates privately litigated class actions could substantially ameliorate these coordination problems. Our proposal, however, is crafted to improve the operations of the mixed public and private enforcement system without implicating the need for further adjustments to the general framework of antitrust law.
13. Use of a Vickrey-style auction could potentially maximize auction proceeds, which the court can then distribute as compensation (or a form of insurance) to replace sanctionable losses. See William Vickrey, "Counterspeculation, Auctions, and Competitive Sealed Tenders" (1961) 16 J. Finance 8 at 20.
14. This premise subsumes without specific consideration the need for and appropriate use of the treble-damage multiplier to offset dilution of deterrent effects from firms calculating ex ante the probability that their antitrust violations will escape detection or otherwise evade the imposition of liability for full sanctionable harm. The term "sanctionable" encompasses harm assessments predicated on either a negligence (unreasonableness) or strict (regardless of reasonableness) test of liability for the agreements or other conduct at issue. "Harm" includes "risk" and for present purposes a threat of liability for sanctionable harm or risk, if imposed prior to accrual of actualized harm, is assumed adequate to achieve optimal deterrence.
15. The role and implementation of the compensation function is discussed infra at Section IV. Note the parallel between our assumption and the Illinois Brick rule, discussed infra at Section III, which prioritizes deterrence over compensation by collectivizing claims for the benefit of direct purchasers and denying standing to indirect purchasers to whom overcharges may have been passed.
16. The exception, of course, is the criminal offence, the prosecution of which is the exclusive province of the state. For an interesting historical look at why this is the case, see John H. Langbein, The Origins of Adversary Criminal Trial (Oxford: Oxford University Press, 2002).
17. Perhaps more so for antitrust law than for other fields, since the federal statutes regarding antitrust claims authorize treble damages for private plaintiffs to offset the probability that offenders will evade detection or otherwise escape sanctions. The method by which the legislature arrived at its damage multiplier is not readily discernible from the text of the statute or from its legislative history. Important questions arise regarding whether the multiplier should be raised or lowered, or should be fixed or flexible. See e.g., Posner, supra n. 1 at 272-73, proposing that the legislature replace treble damages with a "flexible multiple" decided by a jury on a case-by-case basis. Since our analysis of coordination problems holds constant the substance and process of the existing legal framework, these and similar questions relating to reform of that framework lie beyond the scope of this essay.
18. Consider a simple illustration of the point. Suppose the optimal aggregate enforcement level is ten units, with private enforcers normally providing seven units and public enforcers supplying three units. If skewed incentives push private enforcement to eight units, the government can respond by scaling back its own enforcement to two units. However, if private enforcement skyrockets to eleven units, there is no reduction strategy available to the government that will achieve the optimal joint level of enforcement; over-enforcement of at least one unit will occur.
19. If the phase metaphor is unavailing, consider the African fable of the tortoise, the elephant and the hippopotamus. The lowly tortoise challenges each of his fellow creatures to a tug-of-war, then ties the elephant and the hippopotamus to opposite ends of a very long rope, thus preventing either from pulling too far in one direction: See Gilbert Morris Cuthbertson, Political Myth and Epic (East Lansing, MI: Michigan State University Press, 1975) at 184.
20. See Steven Shavell, Foundations of Economic Analysis of Law (Cambridge, MA: Harvard University Press, 2004) at 391-401, which notes "the private incentive to bring suit is fundamentally misaligned with the socially optimal incentive to do so, and the deviation between them could be in either direction" (emphasis added)
21. Steven Shavell, "The Fundamental Divergence Between the Private and the Social Motive to Use the Legal System" (1997) 26 J. Legal Stud. 575 at 577, which notes "The level of litigation is not generally socially correct because there exist what may fairly be called fundamental differences between private and social incentives to use the legal system." Professor Shavell's extensive work on these questions has stimulated an extensive literature on this topic.
22. See, e.g., Louis Kaplow, "Private Versus Social Costs in Bringing Suit" (1986) 15 J. Legal Stud. 371
23. Peter S. Menell, "A Note on Private Versus Social Incentives to Sue in a Costly Legal System" (1983) 12 J. Legal Stud. 41.
24. It is not our aim to prove that this misalignment cuts one way or the other; it is rather to identify the range of potential problems in the current system.
25. See, e.g., Christopher R. Leslie, "Trust, Distrust, and Antitrust" (2004) 82 Tex. L. Rev. 515 at 641-42, noting that "The cost of follow-on private suits can be overwhelming. For example, at the conclusion of the criminal cases against the electrical manufacturers convicted of price-fixing, approximately 2,000 private damage suits representing 25,000 separate antitrust claims were filed against the companies. Not surprisingly, the plaintiffs did well at trial."
26. Posner, supra n. 1 at 275, warns against taking this prospect lightly: "the plaintiffs'bar cannot be relied upon to exercise reasonable self-restraint.... Students of the antitrust laws have been appalled by the wild and woolly antitrust suits that the private bar has brought-and won. It is felt that many of these would not have been brought by a public agency and that, in short, the influence of the private action on the development of antitrust doctrine has been on the whole a pernicious one."
27. See the sources cited supra n. 20.
28. Full internalization of these costs, as noted below, can have the opposite effect of decreasing the private investment and effort below the optimal level.
29. See Posner, supra n. 1 at 275, noting that "If antitrust doctrine were pellucid and the courts unerring in applying it to particular disputes, there would be no problem; cases that had merely colorable, and not real, merit would fail and the extortion problem... would disappear. But these conditions do not obtain" (emphasis added).
30. See, e.g., Robert H. Lande, "Why Antitrust Damage Levels Should Be Raised" (2004) 16 Loy. Consumer L. Rev. 329, arguing that treble damages are not sufficient to motivate efficient levels of private antitrust litigation.
31. 431 U.S. 720 (1977); see infra Section III. Because indirect purchasers do not have standing under federal antitrust laws, they must assert claims on the basis of the so-called "state repealer statutes" that recognize such claims as valid. This reliance on state law hampers courts from certifying large-scale, multi-state class actions to prosecute violations that typically cross state boundaries to inflict harm regionally or nationwide.
32. As an example, compare the following lawyer recruiting information: "Compensation," online: Susman Godfrey L.L.P. Attorneys at Law, http://www.susmangodfrey.com/recruit/recruit_philosophy.html#compensation (accessed 2 February 2005), noting a first-year associate's salary of $125,000, and "Salary Table 2004-GS," online: U.S. Office of Personnel Management http://www.opm.gov/flsa/oca/04tables/ html/gs.asp (accessed 2 February 2005), noting a starting pay-grade of $44,136 for GS-11 federal employees such as new FTC lawyers.
33. Posner, supra n. 1 at 275-76.
34. As a structural matter, there is no check on agency permissiveness with regard to antitrust violations. Compare Stephen Calkins, "Perspectives on State and Federal Antitrust Enforcement" (2003) 53 Duke L.J. 673 at 701.
35. See online: Eliot Spitzer 2006, http://www.spitzer2006.com/main.cfm, promoting Mr Spitzer's candidacy for Governor of the state of New York.
36. See generally Levinson, supra n. 4.
37. See Posner, supra n. 1 at 13-14, explaining the economic nature of the societal harm inherent in an antitrust violation in terms of substitution and rent-seeking costs.
38. It should be apparent that the aggregate price paid at auction to acquire the class action, and consequently the aggregate fund available for purposes of compensation, depends directly on the effectiveness of the private class action in maximizing return for investors. As such, the argument for use of mandatory class action affects the compensation as well as deterrence functions of civil antitrust liability.
39. For a full treatment of the mandatory-litigation class action in the context of mass tort claims, see David Rosenberg, "Mandatory-Litigation Class Action: The Only Option for Mass Tort Cases" (2002) 115 Harv. L. Rev. 831.
40. Of course, the hallmark of mass production cases is that few claims are prosecuted independently, at least when free-riding on the work product of others is taken into account. Rather, even in the absence of a class action, lawyers compete to acquire shares of actual and potential claims, customarily using various formal and informal aggregation measures, ranging from cooperative arrangements for sharing expenses and information to claim inventories, joinder, and consolidation. However, such fractional aggregation, short of comprehensive collectivization by a class action or a functional equivalent, never assures the full opportunity to exploit scale efficiencies that would enable plaintiffs to maximize the civil liability benefits of deterrence and insurance. In short, total aggregation is necessary to provide plaintiffs and courts with a full opportunity to exploit scale efficiencies in litigation and thus counter the asymmetry in litigation power favoring defendants that results from their ability to exploit de facto class action scale efficiencies in the standard separate action process. While it is more realistic to talk in terms of fractional aggregation, and we do so at later points of discussion, it would not change the basics of our present analysis and conclusions.
41. 392 U.S. 481 (1968) at 493-94, rejecting a passing-on defence in part because such a rule would reduce the effectiveness of private treble-damage actions.
42. Illinois Brick, supra n. 28 at 735, asserting that "the antitrust laws will be more effectively enforced by concentrating the full recovery for the overcharge in the direct purchasers rather than allowing every plaintiff potentially affected by the overcharge to sue only for the amount it could show was absorbed by it." The direct purchaser rule was also a response to the difficulty inherent in determining the extent to which an overcharge has been passed down the supply chain.
43. Ibid. at 732-33.
44. See also In re Brand Name Prescription Drugs Antitrust Litigation, 123 F.3d 599 (7th Cir. 1997) at 605 per Posner J., who observed "Tracing a price hike through successive resales is an example of what is called 'incidence analysis,' and is famously difficult."
45. Illinois Brick, supra n. 28 at 746, "the legislative purpose in creating a group of 'private attorneys general' to enforce the antitrust laws... is better served by holding direct purchasers to be injured to the full extent of the overcharge paid by them than by attempting to apportion the overcharge among all that may have absorbed a part of it" (citations omitted).
46. See, e.g., McCarthy v. Recordex Services, Inc., 80 F.3d 842 (3d Cir. 1996) at 855, "The Supreme Court, in [Kansas v. Utilicorp United, Inc., 497 U.S. 199 (1990)], expressly refused to recognize an exception to Illinois Brick even where one hundred percent of the cost increases had been passed through to indirect purchasers."
47. See Kansas v. Utilicorp United, Inc., ibid., holding that exceptions to the direct purchaser rule are proper only where it can be proven that the direct purchaser suffered absolutely no injury.
48. Our proposal also avoids the problem of tracing the overcharge through the supply chain. Because the license-holder is entitled to all damages resulting from a specific anticompetitive act, it will be sufficient to demonstrate the magnitude (and not the distribution) of the economic harm.
49. In effect, the defendant is able to use the plaintiffs' numbers against them. Even though tortious harm could reach into the millions of dollars, the defendant may be able to avoid liability altogether so long as it disperses this harm across enough individuals. See Bruce L. Hay & David Rosenberg, "'Sweetheart' and 'Blackmail' Settlements in Class Actions: Reality and Remedy" (2000) 75 Notre Dame L. Rev. 1377 at 1379-80.
50. See also Randy J. Kozel & David Rosenberg, "Solving the Nuisance-Value Settlement Problem: Mandatory Summary Judgment" (2004) 90 Va. L. Rev. 1849 at 1880.
51. Although their motivations for investing in the litigation differ from those of the parties, judges, it is not unrealistic to assume, more or less consciously allocate judicial resources to best effectuate the social objectives of the law they make and apply, and therefore, to some extent, exploit the value-enhancing opportunities of class action scale efficiencies.
52. For example, maximizing adjudicative investment may compel courts to appoint neutral experts more frequently. This practice is outlined in Fed. Rules Evid. R. 706 Court Appointed Experts, but it is rarely used.
53. The settlement-only class action received judicial authorization for use in some types of cases in Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997) at 616.
54. Another significant difference is that, in the settlement-only class action, the defendant, having final say over whether to settle class-wide or not, exercises complete veto power over who will serve as class counsel, or more accurately, over whether and the extent to which a class action will be certified. In the litigation class action, the defendant has no say over either aspect of the process.
55. Although settlement-only class actions have become a staple of complex civil litigation, they indeed offer little if any functional advantage over the standard, separate action process and are decidedly inferior to an appropriately designed litigation class action. For a comparative assessment of the functional productivity of settlement-only and litigation class actions, see David Rosenberg, "Adding a Second Opt-out To Rule 23(b) (3) Class Actions: Cost Without Benefit" (2003) U.Chicago Legal F. 19.
56. For explanation of the ex ante preference for deterrence, see Rosenberg, supra n. 35 at 840-44.
57. For a recent study documenting the relatively small fraction of class members who elect to opt out, see Theodore Eisenberg & Geoffrey P. Miller, "The Role of Opt-outs and Objectors in Class Action Litigation: Theoretical and Empirical Issues" (2004) 57 Vand. L. Rev. 1529. Low opt-out rates, however, do not contradict our analysis. First, the most likely to exit are claims with relatively higher expected value.
58. See Rosenberg, ibid. at 891, n. 119. Second, in the face of a credible threat of opting-out to free-ride, the class action investment will be lowered to reduce the costs and therefore the marginal gain from opting-out for a free-ride.
59. Mandatory collectivization is already a prominent feature of the mechanism for enforcing antitrust law. As noted earlier, in price-fixing cases the United States Supreme Court has adopted a rule that bars claims by indirect purchasers, whose difficulty in proving individual sanctionable loss dilutes the deterrent effect from threatened liability, and effectively assigned their aggregate litigable interest to wholesalers and other direct purchasers. See Illinois Brick, supra n. 28. Because its deterrent effect would reflect aggregate liability and damages undiluted by impediments to individual loss determinations, the mandatory-litigation class action we propose could fully replace the Illinois Brick rule, which is often costly and complicated to apply.
60. See, e.g., False Claims Act, 31 U.S.C. § 3729-33.
61. These include enforcers employing the whipsaw tactic against targets and defendants in settlement and plea negotiations. The strategy involves one enforcer extracting a concession that is then used by the other as the bargaining floor for demanding and wringing out even more from the target or defendant. This process may go on for multiple rounds of bargaining, steadily ratcheting up the total price paid by the defendant or target to resolve its exposure to public and private sanctions. In suspending private enforcement, our proposal also precludes use of the Fifth Amendment dilemma tactic. This ploy involves the private enforcer using civil discovery interrogation to force a target or defendant into the choice between invoking or waiving its Fifth Amendment privilege against self-incrimination. Either course of action carries a high price. Providing incriminating information in civil discovery bolsters not only the private enforcer's case in the class action, but also the public enforcer's case for criminal penalties. However, invocation of the privilege to avoid increasing exposure to criminal prosecution usually comes with a costly sanction on the private enforcement side; typically the court will presume that the discovery response would have been incriminating and admits this as evidence against the privilege-invoking defendant at trial of the class action.
62. Rather than auctioning many fractionated actions of small value, the government will in most cases be auctioning off large class actions, the "mandatory" nature of which, including preclusion of opt-out, make them stable and readily valued assets. See Section II. The costs of the auction system are thereby reduced.
63. Underenforcement would still be a problem if the government attempted to delay private litigation by refusing to close the investigation in a particular case. To avoid the potential for such dilatory tactics, the enforcement agency might be required to auction a claim that has been dormant for some specified period of time.
64. Macey and Miller suggest an auction model for large-scale, small-claim class actions. See Jonathan R. Macey & Geoffrey P. Miller, "The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform" (1991) 58 U. Chicago L. Rev. 1 at 105-16
65. see also David Rosenberg, "The Causal Connection in Mass Exposure Cases: A 'Public Law' Vision of the Tort System" (1984) 97 Harv. L. Rev. 849 at 914-15 & n247.
66. For a thorough examination of the pitfalls to using class counsel auctions, see "Third Circuit Task Force Report: Selection of Class Counsel" (2001), online: Third Judicial Circuit, http://www.ca3.uscourts.gov/classcounsel/final%/ 20report%20of%20third%20circuit%20task%20force.pdf at 17-18. The record of statements and reports submitted to the Task Force are available on the Third Circuit's website; online: http://www.ca3.uscourts.gov.
67. See also Lucian A. Bebchuk, "The Questionable Case for Using Auctions to Select Lead Counsel" (2002) 80 Wash. U.L.Q. 889.
68. For an exchange about the workability of class action auctions, see Randall S. Thomas & Robert G. Hansen, "Auctioning Class Action and Derivative Lawsuits: A Critical Analysis" (1993) 87 Nw. U.L. Rev. 423 at 447-48;
69. Jonathan R. Macey & Geoffrey P. Miller, "Auctioning Class Action and Derivative Suits: A Rejoinder" (1993) 87 Nw. U.L. Rev. 458 at 460-62. One concern is that in not giving the "first to file" any preference in acquiring the class action, the auction would diminish incentives for private enforcers to ferret out antitrust violations that might otherwise escape the notice of public enforcers.
70. See "Developments in the Law - The Paths of Civil Litigation" (2000) 113 Harv. L. Rev. 1827 at 1839. How much private reporting would be lost is an empirical question, but there is reason to believe that the reduction in reporting might not be great. In the antitrust area, there are many market participants, such as competitors injured by illegal predatory pricing, who might benefit sufficiently from public enforcement to "blow the whistle" on violations even without the prospect of acquiring control over ensuing private civil actions. Moreover, public enforcers can pay rewards to promote "whistle blowing." Further, those who invest in investigating such violations will likely have a significant private-information advantage in valuing the class claim and developing bids accordingly. Bidders may discount their offers somewhat to account for the chance their investigatory and other investments in working up their respective bids will not ultimately yield a winning or profitable bid. This is a normal consequence of any competitive market process and, in any event, may have no functional significance when deterrence is the primary objective. While there are undoubtedly other devils in the details, we leave their exorcism to a later day. For present purposes we proceed on the general evidence of the routine use and social benefit from using auctions to allocate large-scale public and private assets and projects.
71. See, e.g., Evan Kwerel & Walt Strack, "Auctioning Spectrum Rights" (February 20, 2001), online: U.S. Federal Communications Commission, http://wireless.fcc.gov/auctions/data/papersAndStudies/aucspec.pdf
72. Peter Cramton, "The Efficiency of the FCC Spectrum Auctions" (1998) 41 J.L. & Econ. 727 at 729
73. see also Martin Shubik, "Auctions, Bidding, and Markets: An Historical Sketch," in Richard Engelbrecht-Wiggans, Martin Shubik & Robert M. Stark, eds., Auctions, Bidding, and Contracting (New York: New York University Press, 1983) at 33 (reporting that in A.D. 193, the entire Roman Empire was auctioned by the Practorian Guards to Didius Julianus). Our analysis and intuition strongly suggest that class action auctions will not prove the exception to the general rule.
74. The reasons for using civil liability as a means of compensation are noted below in connection with discussion of the judicial disposition of proceeds from the class action auction.
75. The computation of a bid in a Vickrey auction involves no estimation of the bidding behavior of other parties, thus reducing the cost of preparing a bid.
76. An alternative, modeled on what is called the "English" auction, might also serve the purpose of generating a winning bid that approximates the "correct" net expected value of the class claim. The English auction involves open bidding with the auctioneer soliciting progressively higher bids until only one willing bidder remains to pay the "first price." See Paul R. Milgrom & Robert J. Weber, "A Theory of Auctions and Competitive Bidding" (1982) 50 Econometrica 1089 at 1091
77. see also Jill E. Fisch, "Lawyers on the Auction Block: Evaluating the Selection of Class Counsel by Auction" (2002) 102 Colum. L. Rev. 650 at 664. The version that might best suit the auctioning of class actions would essentially involve a multi-round auction. Each round would proceed with bidders submitting scaled bids, and, at the close of the round, the winning bid being announced and solicitation for the other bidders to submit matching bids. If no matching bids are submitted, the high bidder has bought the class action. If matching bids are submitted, there will be another round of scaled-bid submissions with the minimum bid set equal to the matched bid price established at the close of the preceding round. Only those who submit matching bids are eligible to participate in the next round. The process continues until a round ends in which no bids are submitted to match the winning bid. This model resembles the one used in FCC spectrum auctions.
78. See Cramton, supra n. 55.
79. The result does not follow as a matter of necessity. If the non-defendant bidders were risk-neutral, they might well disregard the presence of a better-informed participant, the potential defendant, given an equal probability that the private information indicates higher or lower value to the class claim than is generally appreciated.
80. A third function commonly performed in other settings, that of reimbursing and rewarding parties who bear enforcement costs, is absent in our system: The enforcing party will be the winning bidder, whose payoff is the full recovery of class-wide damages.
81. Compare William M. Landes & Richard A. Posner, "Should Indirect Purchasers Have Standing to Sue Under the Antitrust Laws? An Economic Analysis of the Rule of Illinois Brick" (1979) 46 U. Chicago L. Rev. 602 at 605.
82. It may enhance welfare to individualize this ex ante payoff when the risk of illegal loss is not generally and randomly distributed. However, because of the typically small amounts of money involved, prohibitively high administrative cost will often prevent tailoring tax reductions to sanctionable loss.
83. Given that the auction proceeds equal the aggregate expected value of the class claim, the court might use the funds as a premium for an insurer or other indemnifier to assure payment of the full sanctionable loss as determined by class action judgment or settlement. The court could solicit bids for taking on this contingent insurance obligation, with the winner receiving the auction proceeds as the premium for covering the upside of the litigation gamble.
84. Whether the public enforcer simply deposits the price with the court or reimburses the auction winner for making such payment seems a detail of no functional significance. In a system employing the reimbursement procedure and a Vickrey auction, the public enforcer pays the winning bidder an amount equal to the second price and pays the balance of the winning bid price to the court.
85. To reduce the variance in such settlements and pre-empt temptation to collude, the arrangement may provide a floor and ceiling bracketing the defendant's ultimate obligation. As such, the prospective defendant would agree to pay a fine equal to the difference between the winning bid price and some specified minimum amount or, on the upside, to pay up to some maximum amount with the public enforcer paying the balance of the winning bid price.
86. See, e.g., Louis Kaplow, "An Economic Analysis of Legal Transitions" (1986) 99 Harv. L. Rev. 509 at 602-606
87. Frank I. Michelman, "Property, Utility, and Fairness: Comments on the Ethical Foundations of 'Just Compensation' Law" (1967) 80 Harv. L. Rev. 1165
88. but see Steve P. Calandrillo, "Eminent Domain Economics: Should 'Just Compensation' Be Abolished, and Would 'Takings Insurance' Work Instead?" (2003) 64 Ohio St. L.J. 451 at 509-12. Notice that our proposal is far more likely to yield a price that private parties will view as "fair." Unlike the eminent domain setting, which allows for great variance in the computation of what is "just compensation," our proposal pegs the government's buyback price according to bids actually elicited at auction.