Rebuilding Illinois Brick: A functionalist approach to the indirect purchaser rule

Southern California Law Review

Volumn 81, Issue 1, 2007, Pages 69-109

  Richman, Barak D ^a   Murray, Christopher R ^b  

^a DUKE UNIVERSITY   (United States)

^b Department of International Practice

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EID: 38649096596     PISSN: 00383910     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (214)

1. Ill. Brick Co. v. Illinois, 431 U.S. 720 (1977).
2. The rule applies to private causes of action brought under section 4 of the Clayton Act, 15 U.S.C. § 15 (2000). Ill. Brick. Co., 431 U.S. at 728-29.
3. See infra Part III.
4. Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481 (1968).
5. ANTITRUST MODERNIZATION COMM'N, REPORT AND RECOMMENDATIONS 18 (2007), available at http://www.amc.gov/report_recommendation/amc_final_report.pdf [hereinafter AMC REPORT AND RECOMMENDATIONS]. The AMC was created by Congress to evaluate, and if appropriate, recommend changes to the antitrust laws. Antitrust Modernization Commission Act of 2002, Pub. L. No. 107-273, §§ 11052-11053,116 Stat. 1856. The AMC proceedings are discussed in Part II.D.
6. Edward D. Cavanagh, Illinois Brick: A Look Back and a Look Ahead, 17 LOY. CONSUMER L. REV. 1, 3 (2004).
7. The full range of proposed solutions is discussed in Part II.D.
8. Ill. Brick Co. v. Illinois, 431 U.S. 720, 765 (1977) (Blackmun, J., dissenting).
9. Hanover Shoe, 392 U.S. at 489.
10. Ill. Brick Co., 431 U.S. at 746-47.
11. Hanover Shoe, 392 U.S. at 481.
12. Id. at 483. United Shoe was found to have violated the antitrust laws in separate proceedings in United States v. United Shoe Machinery Corp., 110 F. Supp. 295 (D. Mass. 1953). Under section 5 of the Clayton Act, that case established prima facie evidence of an antitrust violation actionable by injured private parties under section 4 of that Act. Hanover Shoe, 392 U.S. at 484-87.
13. Section 4 of the Clayton Act provides in pertinent part: [A]ny person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor in any district court of the United States in the district in which the defendant resides or is found or has an agent, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee.
14. U.S.C. § 15(a) (2000).
15. Hanover Shoe, 392 U.S. at 487-88. United Shoe argued that if Hanover Shoe "had bought machines at lower prices, [it] would have charged less and made no more profit than it made by leasing." Id. at 488.
16. Hanover Shoe, Inc. v. United Shoe Mach. Corp., 185 F. Supp. 826, 830 (M.D. Pa. 1960).
17. Id. at 829-30 (quoting S. Pac. Co. v. Damell-Taenzer Lumber Co., 245 U.S. 531, 533 (1918)). The Third Circuit twice endorsed the district court's rejection of the pass-on defense, first in affirming the decision in the separate trial, Hanover Shoe, Inc. v. United Shoe Mach. Corp., 281 F.2d 481, 481 (3d Cir. 1960) (finding the lower court's reasoning "thoroughly convincing"), and a second time on appeal from the main trial, Hanover Shoe, Inc. v. United Shoe Mach, Corp., 377 F.2d 776, 782 (3d Cir. 1967), aff' d in part. 392 U.S. 481, 488 (1967).
18. The Court was undivided in rejecting the pass-on defense, though Justice White was joined by only six other justices. Justice Marshall did not participate in the decision and Justice Stewart's lone dissent did not reach the Court's conclusion on pass-on. See Hanover Shoe, 392 U.S. at 510-13 (Stewart, J., dissenting).
19. Id. at 489 (majority opinion).
20. Id. at 490, 490-91 n.8 ("As it does not attribute remote consequences to a defendant so it holds him liable if proximately the plaintiff has suffered a loss.'" (quoting S, Pac. Co., 245 U.S. at 533-34)).
21. Though the Court's analysis begins with a reference to proximate cause, that reasoning does not drive the opinion. Rather, the Court's initial use of tort causation, language is best seen as defining the scope of recoverable injury in terms of the harm that was caused by the antitrust violation. This is consistent with the Court's references to language in the Clayton Act regarding "injur[y]" to "property" lost by the plaintiff. Id. at 488-89 (quoting section 4 of the Clayton Act, 15 U.S.C. § 15 (2000)). Indeed, if proximate cause really did require that damages calculations "not., go beyond the first step," id. at 490 n.8, then there would be no room for a cost-plus contract exception,
22. see infra notes 25-26 and accompanying text.
23. Hanover Shoe, 392 U.S. at 493 (noting as to causation, "there would remain the nearly insuperable difficulty of demonstrating that the particular plaintiff could not or would not have raised his prices absent the overcharge or maintained the higher price had the overcharge been discontinued").
24. Id.
25. Id. at 494.
26. Id. (voicing the concern that "those who violate the antitrust laws... would retain the fruits of their illegality because no one was available who would bring suit against them"). The Court's deterrence reasoning did not, however, extend to the disincentivizing effect of increased litigation costs from the complex calculation of pass-on or the incentive-enhancing effect of allocating recovery for more injury than was actually sustained. These arguments appear later in the Illinois Brick decision.
27. See 111. Brick Co. v. Illinois, 431 U.S. 720, 745-46 (1977).
28. Hanover Shoe, 392 U.S. at 494.
29. Id. The exception suggests that avoiding complexity was more important to the Hanover Shoe Court than deterrence. Indeed, deterrence would be just as affected by fragmentation of potential recovery among indirect purchasers with a cost-plus contract as without. This analysis of Hanover Shoe appears in Illinois Brick. III. Brick Co., 431 U.S. at 733 n.13. Significantly, the nonexclusive wording of the exception-"We recognize that there might be situations-for instance,... a pre-existing 'costplus' contract...."-indicates the Court anticipated future exceptions as cases arose where functional considerations would not be advanced by application of the rule. Hanover Shoe, 392 U.S. at 494. An additional exception for a defense where the alleged violator's sale price was the same as that required by law, id., sheds little light on the reasons for denying the pass-on defense, but instead goes to actual cause.
30. Ill. Brick Co., 431 U.S. at 720.
31. Id. at 726.
32. Id. at 727.
33. Id. at 721, 736. Though the Hanover Shoe Court was undivided on the question of a pass-on defense,
34. see supra note 17, the Illinois Brick Court split 6-3 on the question of indirect purchaser standing.
35. See III. Brick Co., 431 U.S. at 723-26. The first line of the opinion is a citation to Hanover Shoe. Id. at 723-24. The second paragraph recites complexity and deterrence rationales for the Hanover Shoe decision; the third paragraph characterizes the legal issue as being the same one decided in Hanover Shoe, casting plaintiffs claim of pass-on injury as the mirror image of the Hanover Shoe defendant's claim of a pass-on defense. Id. at 724-26 ("In this case we once again confront the question whether the overcharged direct purchaser should be deemed ... to have suffered the full injury ....").
36. Id. at 728 (introducing the two-step analysis).
37. Id. at 730. The Court relied on Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251 (1972), for the proposition that the Court had already declined to "open the door to duplicative recoveries...." Ill. Brick Co., 431 U.S. at 731 (quoting Standard Oil Co., 405 U.S. at 264). The dissent was similarly concerned with multiple liabilities, though it argued that procedural mechanisms, already in wide use in lower courts, were adequate to facilitate allocation of damages among direct and indirect purchasers. Id. at 761-64 (Brennan, J., dissenting). The majority found these procedures inadequate, holding that even a risk of "a little slopover on the shoulders of the wrongdoers" was unacceptable and merited a per se ban on pass-on. Id. at 731 n.11 (majority opinion) (quoting Transcript of Oral Argument at 58, Ill. Brick Co., 431 U.S. 720 (No. 76-404)).
38. Id. at 736.
39. The Court noted that stare decisis is particularly important in cases of statutory interpretation where Congress is free to amend the law, declaring in a footnote that "[s]hould Congress disagree with this result, it may, of course, amend the section to change it." Id. at 735 n.14. The dissent jumped on this comment, noting that Congress did recently express its view that indirect purchasers had standing. Id. at 756-58 (Brennan, J., dissenting). The Hart-Scott-Rodino Antitrust Improvements Act of 1976, passed one year earlier, granted state attorneys general standing to sue as parens patriae on behalf of their states' citizens. See Hart-Scott-Rodino Antitrust Improvements Act of 1976, Pub. L. No. 94-435, 90 Stat. 1383. Because consumers are generally indirect purchasers, the dissent reasoned that Congress must have assumed that indirect purchasers had standing to sue. Ill. Brick Co., 431 U.S. at 756-58 (Brennan, J., dissenting).
40. Ill. Brick Co., 431 U.S. at 737. The Court also expressed its concern that procedural devices, such as joinder, would be inadequate to handle the complexity of pass-on cases and might even add irresolvable complexity themselves. Id. at 740-41 (presenting a parade of horribles regarding the difficulty of indirect purchaser suits).
41. Id. at 734-35 ("[A]ntitrust laws will be more effectively enforced by concentrating the full recovery for the overcharge in the direct purchasers . . . .").
42. Id. at 748-49 (Brennan, J., dissenting) (noting both the compensation and deterrence objectives of Congress).
43. Id. at 749, 764 ("[I]n many instances, consumers, although indirect purchasers, bear the brunt of antitrust violations. To deny them an opportunity for recovery is particularly indefensible when direct purchasers.. . pass on the bulk of their increased costs to consumers farther along the chain of distribution.").
44. See id. at 751-53.
45. Id. at 760. Though the core disagreement between the Illinois Brick majority and dissent involves a foundational dispute over the principal motivations underlying antitrust law, the majority's opting for deterrence over compensation is consistent with the Court's other rulings in antitrust cases. For example, in Pfizer, Inc. v. Government of India, 434 U.S. 308, 315 (1978), the Supreme Court ruled that foreign antitrust plaintiffs are entitled to treble damages because ruling otherwise would dilute private enforcement. The Court conceded in Pfizer that "Congress' foremost concern in passing the antitrust laws was the protection of Americans," but pursuing American interests meant deterring conduct that harmed the American market rather than construing standing rules so that compensation was reserved to American parties. Id. at 314.
46. Ill. Brick Co., 720 U.S. at 746-47. The Court acknowledged that recoveries in antitrust suits "often have failed to compensate the individuals on behalf of whom the suits have been brought," id. at 747 n.31, and that Congress "recognize[d] that rarely, if ever, will all potential claimants actually come forward to secure their share of the recovery." Id. (quoting H.R. REP. No. 94-499, at 16 (1975)). Justice Brennan's dissent also took aim at a second functional objective-avoidance of complexity in damages calculations and fear of duplicative recovery. Brennan rejected the majority's assertion that avoiding complexity was, in itself, a reason to reject pass-on in all cases, noting that "[difficulty of ascertainment is no longer confused with right of recovery," id. at 756 (Brennan, J., dissenting) (quoting Bigelow v. RKO Radio Pictures, 327 U.S. 251, 265-66 (1946)), and that "[rjeasoned estimation is required in all antitrust cases," id. at 759.Brennan also attacked the majority's affection for symmetry. He argued that "[djespite the superficial appeal of the argument that Hanover Shoe should be applied 'consistently' . . . there are sound reasons for treating offensive and defensive passing-on cases differently," and that Hanover Shoe "certainly did not imply that an indirect purchaser would not also have [standing]." Id. at 753. He charged the majority with mischaracterizing the Hanover Shoe ruling, which he viewed as having evaluated a choice between "overcompensat[ing] the plaintiff,... or... allowing [the violator] to retain a portion of his ill-gotten overcharges" and opting to risk overcompensation. Id. at 752.
47. Id. at 765 (Blackmun, J., dissenting) (citation omitted).
48. See Andrew I. Gavil, Antitrust Remedy Wars Episode 1: Illinois Brick from Inside the Supreme Court, 79 ST. JOHN'S L. REV. 553. 576-605 (2005).
49. Id. at 596-97. The six justices who initially favored granting standing included Justices Burger, Brennan, Blackmun, Stewart, Powell, and Stevens, with Justices Rehnquist, White and possibly Marshall opposing standing. Id. at 596. Justice White's lobbying won the votes of Chief Justice Burger and Justices Stewart, Powell, and Stevens, with Justice Marshall switching sides to oppose White. Id. at 597.
50. Id. at 601-02 & n.284 (arguing that Justice Powell was swayed in part by Justice Rehnquist's argument that plaintiffs and defendants be "treated in an even-handed manner").
51. Ill. Brick Co., 431 U.S. at 723-29.
52. Roger D. Blair & Jeffrey L. Harrison, Reexamining the Role of Illinois Brick in Modern Antitrust Standing Analysis, 68 GEO. WASH, L. REV. 1, 42 (1999) (calling the Illinois Brick decision "obsolete"). For a discussion of the leading cases,
53. see infra notes 65-68 and accompanying text. Similarly, some commentators speculate that if Illinois Brick had preceded Hanover Shoe and come out differently, then Hanover Shoe itself might also have come out differently.
54. See, e.g., AMC REPORT AND RECOMMENDATIONS, supra note 5, at 438 (separate statement of Commissioner Donald G. Kempf, Jr.).
55. Indeed, if the Court could have pointed to a firmly established possibility of subsequent indirect purchaser suits, it might not have been as concerned with the antideterrent effect of a pass-on defense.
56. Blue Shield of Va. v. McCready, 457 U.S. 465, 485 (1982).
57. Id.
58. See id. at 474 (noting that the Illinois Brick Court "found unacceptable the risk of duplicative recovery. . .").
59. Id. at 474-75.
60. Id. at 473. The Court goes on to address the question of multiple liability by noting that although the Illinois Brick Court "found unacceptable the risk of duplicative recovery," there was no such risk here because the psychologists, having been paid by McCready, could never recover from the HMO. Id. at 474-75.
61. Kansas v. UtiliCorp United, Inc., 497 U.S. 199 (1990).
62. Id. at 204, 219.
63. Id. at 209-10.
64. Id. at 210.
65. Id. at 223-24 (White, J., dissenting).
66. Id. at 220.
67. Id. at 225.
68. Id. at 225-26.
69. Id. at 217 (majority opinion).
70. ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF 91 (1978) ("The whole task of antitrust can be summed up as the effort to improve allocative efficiency without impairing productive efficiency so greatly as to produce either no gain or a net loss in consumer welfare.").
71. As the Supreme Court explained in Continental T. V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 50 n.16 (1977).
72. Per se rules thus require the Court to make broad generalizations about the social utility of particular commercial practices. The probability that anticompetitive consequences will result from a practice and the severity of those consequences must be balanced against its procompetitive consequences. Cases that do not fit the generalization may arise, but a. per se rule reflects the judgment that such cases are not sufficiently common or important to justify the time and expense necessary to identify them. Once established, per se rules tend to provide guidance to the business community and to minimize the burdens on litigants and the judicial system of the more complex rule-of-reason trials, see Northern Pac. R. Co. v. United States, 356 U.S. 1, 5; United States v. Topco Assoes., Inc., 405 U.S. 596, 609-10 (1972), but those advantages are not sufficient in themselves to justify the creation of per se rules. If it were otherwise, all of antitrust law would be reduced to per se rules, thus introducing an unintended and undesirable rigidity in the law.
73. The trend continued last spring in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705, 2725 (2007), which overturned the longstanding rule that vertical price agreements were per se illegal. The Court stated that "departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than. . . upon formalistic line drawing." Id. at 2713 (quoting Continental T V.. Inc., 433 U.S. at 58-59).
74. Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 520-22 (1983) (describing a "multiemployer collective bargaining agreement" whose participants were alleged to have encouraged members and third parties not to deal with labor unions, including plaintiff).
75. Id. at 536-42 (emphasizing that no single factor is dispositive and that, in this area, it is "virtually impossible to announce a black-letter rule that will dictate the result in every case").
76. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 484-88 (1977) (describing plaintiffs alleged damage as that profit it would have gained had its smaller local competitors gone bankrupt, rather than having been acquired by the defendant).
77. Id. at 488. The Court emphasized the required nexus between the harm sought to be avoided and the activity at issue. Id. at 484-89.
78. Some lower courts have resisted the categorical nature of the indirect purchaser rule, avoiding its rigid application and instead applying the functionalist approach in Associated General Contractors and other private enforcement standing cases. For example, in Loeb Industries, Inc. v. Sumitomo Corp., 306 F.3d 469 (7th Cir. 2002), the Seventh Circuit permitted purchasers of copper to bring suit against parties who illegally conspired to fix prices in the copper futures market. Even though the defendants did not sell copper, and thus the plaintiffs were not direct purchasers, the conspiracy inflated copper prices and directly harmed the plaintiffs. Id. at 477, 480-81. To preempt the floodgates of claims from other users of copper, the court applied the Associated General Contractors remoteness test, see supra notes 65-66 and accompanying text, to distinguish between directly harmed copper buyers and more remotely injured parties, Sumitomo, 306 F.3d at 484-95, Sumitomo - a situation in which there were no direct purchasers-illustrates both the limits of the Illinois Brick categorical approach and the utility of antitrust's more functional standing rules.
79. See Josef D. Cooper & David L. Foster, Report of the American Bar Association Antitrust Law Section Task Force on Legislative Alternatives Concerning Illinois Brick Co. v. Illinois, 46 ANTITRUST L.J. 1137, 1141-42 (1978).
80. See id. at 1141 ("[T]he Task Force did not assess the desirability of a legislative reversal... but rather proceeded on the assumption that such legislation .. . would be passed").
81. See id. at 1156-57, 1171.
82. See id. at 1144-45, 1164-70.
83. Id. at 1144, 1148-49. The minority generally agreed. but would have expanded the consolidation mechanism to include antitrust generally, rather than just to indirect purchaser actions, as the majority had proposed. Id. at 1159.
84. Compare id. at 1151-52 (emphasizing the efficiency from the preclusive effect of an exclusive opt-in procedure), with id. at 1164-67 (voicing concern that, because many indirect purchasers lack sophistication and suffer little harm, an opt-in requirement would operate as a "trojan horse" that would keep the class of plaintiffs small).
85. Richard G. Schneider et al., Legislative Issues and Judicial Developments: Report of the American Bar Association Section of Antitrust Law Task Force to Review Proposed Legislation to Repeal or Modify Illinois Brick, 52 ANTITRUST L.J. 841, 849-52 (1983).
86. Id. at 841.
87. 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, 46 U. CHI. L. REV. 602, 634-35 (1979).
88. Id. at 609 ("The remote purchaser may not know that a price increase to him is attributable to a price increase by a remote supplier, and even if he does know, he will find it difficult to discover the reasons for the remote supplier's price increase."), Landes and Posner further argue that indirect purchasers are still as fully compensated under Illinois Brick because they additionally receive the benefits from any recovery by an antitrust suit brought by direct purchasers since the recovery from any such suit would be factored into the prices a direct purchaser charges. Id. at 605. Critics have called this argument "quite implausible." Gregory J. Werden & Marius Schwartz, Illinois Brick and the Deterrence of Antitrust Violations-An Economic Analysis, 35 HASTINGS L.J. 629, 638 (1984) (asserting, in conjunction with fellow commentators, that "Illinois Brick runs counter to the goal of compensation").
89. Robert G. Harris & Lawrence A. Sullivan, Passing on the Monopoly Overcharge: A Comprehensive Policy Analysis, 128 U. PA. L. REV. 269, 351-52 (1979).
90. Landes and Posner responded directly to this point by arguing that "any forbearance by the direct purchaser to sue will be compensated. The supplier must pay something to bind the direct purchaser to him and this payment is, functionally, a form of antitrust damages." William M. Landes & Richard A. Posner, The Economics of Passing On: A Reply to Harris and Sullivan, 128 U. PA. L. REV. 1274, 1278 (1980). For an analysis that Illinois Brick enhanced deterrence primarily by reducing litigations costs, see Werden & Schwartz, supra note 79, at 652-53, 667.
91. For an overview of the legislative response to Illinois Brick at the federal and state levels, see Cavanagh, supra note 6, at 23-29. For a detailed description of the so-called state repealers, see Daniel R. Karon, "Your Honor, Tear Down that Illinois Brick Wall!" The National Movement Toward Indirect Purchaser Antitrust Standing and Consumer Justice, 30 WM. MITCHELL L. REV. 1351 (2004).
92. Id. at 1371.
93. See infra Part III.C.
94. California v. ARC Am. Corp., 490 U.S. 93, 105-06 (1989) ("The congressional purposes on which Illinois Brick was based provide no support for a finding that state indirect purchaser statutes are preempted by federal law.").
95. See, e.g., Cavanagh, supra note 6, at 30-31.
96. Michael F. Brockmeyer et al., ARC America Task Force Report: Report of the American Bar Association Section of Antitrust Law Task Force to Review the Supreme Court's Decision in California v. ARC America Corp., 59 ANTITRUST L.J. 271, 273-74 (1990).
97. Id. at 282-83.
98. Id. at 288-304. The task force also discussed the possibility of attempting to harmonize state repealer statutes to create a uniform standard. Id. at 296-97.
99. AMC REPORT AND RECOMMENDATIONS, supra note 5.
100. See id. at 265-78. Indeed, Illinois Brick was at the top of a list of topics proposed to the AMC by the ABA. See Richard J. Wallis, Report of the Section of Antitrust Law of the ABA to the AMC, 2004 A.B.A. SEC. ANTITRUST L. REP. 2, available at http://www.amc.gov/comments/abaantitrust sec.pdf (last visited Oct. 25, 2007). The proposed reforms in this area are among the most substantial recommendations in the AMC's report.
101. See AMC REPORT AND RECOMMENDATIONS, supra note 5, at 18.
102. See discussion infra Part III.B. Compare ANTITRUST MODERNIZATION COMM'N, TRANSCRIPT OF INDIRECT PURCHASER HEARINGS 107-10, 168-69 (2005), available at http://www.amc.gov/commission_hearings/pdf/ 050627_Indirect_Purchaser_Transcript_rform.pdf [hereinafter TRANSCRIPT OF INDIRECT PURCHASER HEARINGS] (statements of Michael L. Denger, Senior Antitrust Partner, Gibson, Dunn & Crutcher LLP and Andrew I. Gavil, Professor of Law, Howard University Law School) (asserting that most overcharges are passed on, limiting incentives for direct purchasers to sue), with Harris & Sullivan, supra note 80, at 290-94 (arguing that in the long run all overcharges are passed on). The modern commentators were also able to cite anecdotally cases where direct purchasers were slow to bring claims despite recoverable injury under Hanover Shoe. TRANSCRIPT OF INDIRECT PURCHASER HEARINGS, supra, at 17-18, 24-25 (statements of H. Laddie Montague, Jr., Chairman of Antitrust Dep't, Berger & Montague, P.C. and Mark J. Bennett, Att'y Gen. of Hawaii).
103. TRANSCRIPT OF INDIRECT PURCHASER HEARINGS, supra note 92, at 18 (statement of H. Laddie Montague, Jr., Chairman of Antitrust Dep't, Berger & Montague, P.C.).
104. AMC REPORT AND RECOMMENDATIONS, supra note 5, at 4 (reviewing discarded alternatives to preemption).
105. Id. at 267.
106. Id. The AMC's recommendation to repeal Illinois Brick was not, however, a foregone conclusion: there was substantial disagreement among the commissioners, with several writing separate commentary explaining their positions. The final votes in the AMC on whether to repeal Illinois Brick and Hanover Shoe was 12 to 3, with several more suggesting their view was driven not by concern for indirect purchasers, but rather the logistical problems posed by state indirect purchase recovery statutes. See id. at 266.
107. See WORKING GROUP ON CIVIL REMEDIES, AMERICAN ANTITRUST INST., COMMENTS TO THE ANTITRUST MODERNIZATION COMMISSION BY THE AMERICAN ANTITRUST INSTITUTE'S WORKING GROUP ON CIVIL REMEDIES CONCERNING THE AMC'S PROPOSAL REGARDING DIRECT & INDIRECT PURCHASER ACTIONS 3 (2007), available at http://www.antitrustinstitute. org/Archives/amc071.ashx. The American Antitrust Institute supports indirect purchaser recovery in theory, but it disapproves of the AMCs flat reversal of Illinois Brick and Hanover Shoe.
108. See Letter from Albert A. Foer, President, American Antitrust Inst., to the Honorable Patrick J. Leahey, Chairman, Senate Judiciary Comm. et al. 3 (Apr. 30, 2007), available at http://www.antitrustinstitute.org/ Archives/amc072.ashx ("We praise the AMC for urging this expansion of the Illinois Brick repealer principle ... however, it appears to us that under the AMC proposal, this theoretical expansion will be much more than offset by the decimation of the direct purchaser recovery, with the result that there will be less deterrence ....").
109. Europe is also struggling over indirect purchaser standing, but the debate is still in its infancy. A 2004 comparative study of European competition law, in which antitrust experts in each European country were surveyed regarding private antitrust enforcement in their home country, reported that almost no cases had addressed either the standing of indirect purchasers or the availability of a pass-on defense. See DENIS WAELBROECK, DONALD SLATER & GIL EVEN-SHOSHAN, STUDY ON THE CONDITIONS OF CLAIMS FOR DAMAGES IN CASE OF INFRINGEMENT OF EC COMPETITION RULES 77-79 (2004), available at http://ec.europa.eu/comm/competition/antitrust/others/actions_for_damages/ comparative_report_clean_en.pdf. The closest parallel to the political wrangling in the United States was a failed legislative proposal in Germany that would have enacted a rule against the pass-on defense. Id. at 79. Interestingly, those experts generally concluded both that a pass-on defense was appropriate (as long as the burden of proof fell on the defendant) and that indirect purchasers should have standing to sue (as long as they could establish causation), Id. at 111.
110. The debate in Europe, however, is likely to pick up steam as the European Commission is increasingly seeking mechanisms to encourage private enforcement of its competition laws. In December 2005, the European Commission published a "Green Paper" designed to improve and facilitate private enforcement of EC competition law, and it identified the pass-on defense and indirect purchaser standing as important issues to address. See COMM'N OF THE EUROPEAN CMTYS., GREEN PAPER: DAMAGES ACTIONS FOR BREACH OF THE EC ANTITRUST RULES 3, 7-8 (2005), available at http://eur-lex.europa.eu/LexUriServ/site/en/com/2005/com2005_0672en01 .pdf. One European commentator has declared the problem of passing-on in indirect purchaser actions to be "probably the central problem of private antitrust enforcement." Friedrich Wenzel Bulst, Private Antitrust Enforcement at a Roundabout, 7 EUR. BUS. ORG. L. REV. 725, 732 (2006) (emphasis in original).
111. Compare Ill. Brick Co. v. Illinois, 431 U.S. 720, 749 (1977) (Brennan, J., dissenting) (stressing compensation as a functional objective), with id. at 745 (majority opinion) (emphasizing the need to decrease costs and concentrate benefits of bringing a treble-damages action to facilitate antitrust enforcement).
112. See id. at 746-47.
113. See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 486 n.10 (1977) ("The initial House debates concerning provisions related to private damages actions reveal that these actions were conceived primarily as lopen[ing] the door of justice to every man, whenever he may be injured by those who violate the antitrust laws, and giv[ing] the injured party ample damages for the wrong suffered.'") (alterations in original) (quoting 51 CONG. REC. 9073 (1914) (remarks of Rep. Webb)).
114. See, e.g., JULES L. COLEMAN, RISKS AND WRONGS 317-18 (1992). Corrective justice theory finds its origins in Aristotle's writings. See ARISTOTLE, THE NICOMACHEAN ETHICS 116-25 (Hugh Tredennick ed., J.A.K. Thomson trans., Penguin Books 2004) (1953).
115. See OLIVER WENDELL HOLMES, JR., THE COMMON LAW 94-96 (Mark DeWolfe Howe ed., Harvard Univ. Press 1967) (1881). For a more contemporary utilitarian approach in tort law,
116. see WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF TORT LAW (1987);
117. STEVEN SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT LAW (1987).
118. See Ill. Brick Co., 431 U.S. at 764 (Brennan, J., dissenting).
119. Landes and Posner suggest that indirect purchasers receive equivalent compensation from antitrust violators since the gains from direct purchasers who bring victorious suits are passed down, just as overcharges are passed down, see Landes & Posner, supra note 78, but this argument has been called "quite implausible," see Werden & Schwartz, supra note 79, at 638.
120. See, e.g., COMMODITY CHAINS AND GLOBAL CAPITALISM (Gary Gereffi & Miguel Korzeniewicz eds., 1994) (illustrating the rise of global commodity chains and the spread of multilevel, international production networks);
121. THOMAS L. FRIEDMAN, THE WORLD IS FLAT: A BRIEF HISTORY OF THE TWENTY- FIRST CENTURY (2d ed. 2006).
122. For a discussion of the legislative history of the private enforcement provision of the Clayton Act, see Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 486 n.10 (1977) ("The House debates following the conference committee report ... indicate that the sponsors of the bill also saw treble-damages suits as an important means of enforcing the law." (citing 51 CONG. REC. 16274-75 (statement of Rep. Webb), 16317-19 (statement of Rep. Floyd))). The documents referenced in Brunswick can be found in 2-3 THE LEGISLATIVE HISTORY OF THE FEDERAL ANTITRUST LAWS AND RELATED STATUTES (Earl W. Kintner ed., 1978).
123. See sources cited supra note 107. Others have viewed treble damages as an attempt to approximate an optimal sanction. See William M. Landes, Optimal Sanctions for Antitrust Violations, 50 U. CHI. L. REV. 652, 653 (1983). Landes proposes that an optimal fine for an antitrust violation would be the economic harm resulting from that antitrust violation divided by the probability of the violator being held accountable. Id. at 657. Modeled from tort theory, the formula intends to force the violator to internalize the societal costs of the antitrust violation, with the trebling of damages compensating for the uncertain probability that the violation will be detected. Id. at 676. Landes suggests that this would mean that violations would only occur when the efficiency gains of the conduct outweigh the now-internalized cost to society. Id. at 653. One problem with this approach, however, is it neglects that antitrust law is supposed to punish only socially undesirable, that is, welfare-reducing, conduct. Thus, if substantive antitrust law was properly applied, violations would be limited to conduct that reduces total surplus, and "efficient violations" would not be violations at all. Perhaps, from a functional perspective, overdeterrence (that is, deterring socially desirable conduct) is impossible, except to the extent that excessive fines for violations may increase bankruptcy risk and its attendant social costs. But if there is a cost to administering or imposing high fines, and there otherwise is a reason to make fines as low as possible while still deterring all potential violations, then the Landes formula makes sense.
124. Private enforcement was a critical element of Aristotle's conception of rectificatory or corrective justice. ARISTOTLE, supra note 102, at bk. V, ch. 4. For corrective justice theorists who embrace the Aristotelian approach for role of private enforcement in tort law, see Jules L. Coleman, The Morality of Strict Liability, 18 WM. & MARY L. REV. 259 (1976);
125. Richard A. Epstein, Nuisance Law: Corrective Justice and Its Utilitarian Constraints, 8 J. LEGAL STUD. 49 (1979);
126. George P. Fletcher, Fairness and Utility in Tort Theory, 85 HARV. L. REV. 537 (1972). For a summary of contemporary corrective justice theories,
127. see Stephen R. Perry, The Moral Foundations of Tort Law, 77 IOWA L. REV. 449, 449-50 (1992) (outlining "annulment" and "obligation of reparation" theories of corrective justice).
128. The informational advantage enjoyed by private actors relates to Friedrich Hayek's famous championing of market mechanisms, in which individuals utilize their decentralized knowledge through spontaneous action. See Friedrich A. Hayek, The Use of Knowledge in Society, 35 AM. ECON. REV. 519 (1945). Many contemporary economists employ this same logic.
129. See, e.g., STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 578-79 (2004) (observing that the optimal structure of law relies, in large part, on private enforcement due to informational advantages enjoyed by private parties). In practice, this rationale is mitigated somewhat since many private antitrust enforcement actions emerge not from private discovery of an antitrust violation but instead follow a public investigation and criminal prosecution for the same conduct.
130. See, e.g., John C. Coffee, Jr., Rescuing the Private Attorney General: Why the Model of the Lawyer as Bounty Hunter Is Not Working, 42 MD. L. REV. 215, 222 n.16 (1983) (describing a "legion" of "tag-along" private antitrust actions which followed government prosecutions);
131. Howard M. Erichson, Coattail Class Actions: Reflections on Microsoft, Tobacco, and the Mixing of Public and Private Lawyering in Mass Litigation, 34 U.C. DAVIS L. REV, 1, 5 (2000) (noting that "[t]he chance of successful private litigation rises dramatically when government litigation paves the way").
132. An equally important rationale behind private antitrust enforcement rests on Oliver Williamson's more general point (coined the problem of "selective intervention") that public institutions cannot replicate the incentives of private parties. See OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM (1985). We might expect the incentives of public enforcers to be insufficiently acute to muster adequate policing and deterrence of antitrust violations.
133. See supra notes 71-75 and accompanying text.
134. See supra notes 78-81 and accompanying text.
135. See supra note 81.
136. Herbert Hovenkamp, The Rationalization of Antitrust, 116 HARV. L. REV. 917, 941-42 (2003) (reviewing RICHARD A. POSNER, ANTITRUST LAW (2d ed. 2001)).
137. Id.
138. Memorandum from the Antitrust Modernization Comm'n Staff to the Antitrust Modernization Comm'n Comm'rs 12-13 (May 4, 2006), available at http://www.amc.gov/pdf/ meetings/CivRem-IndP_DiscMemo060504-fin.pdf (summarizing testimony before the Commission).
139. Maarten Pieter Schinkel, Jan Tuinstra & Jakob Rüggeberg, Illinois Walls: How Barring Indirect Purchaser Suits Facilitates Collusion (Amsterdam Ctr. for Law & Econ., Working Paper No. 2005-02, 2005), available at http://ssrn.com/abstract=730384. The authors argue that antitrust violators could reach tacit agreements with direct purchasers to discourage lawsuits, such as through output volume manipulation. Id. at 6.
140. Id. at 9-13. See also Maarten Pieter Schinkel & Jan Tuinstra, Illinois Walls in Alternative Market Structures (May 2005) (unpublished manuscript, available at http.//ssrn.com/abstract=729843) (demonstrating how Illinois Walls are robust enough to thrive in a variety of market arrangements).
141. Those examples include the Brand Name Prescription Drugs litigation involving cooperative conduct between manufacturers and wholesalers, see In re Brand Name Prescription Drugs Antitrust Litigation, Nos. 94 C 897, MDL 997, 1994 WL 663590 (N.D. 111. Nov. 18, 1994), cartelization of the lysine and citric acid markets by Archer Daniels Midland Company and others, as well as the Microsoft case. Schinkel et al., supra note 117, at 28-31.
142. A logical extension of the informational advantages enjoyed by private enforcers is that these advantages increase as the number of private enforcers rises. See supra note 110.
143. See also Landes, supra note 108, at 657. The true antecedents of this law and economics approach to calculating optimal sanctions lies in Gary Becker's work on criminal law.
144. See Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169 (1968).
145. See infra note 122. This theory is true if one accepts that a particular antitrust violation has an "optimal fine." An optimal fine for an antitrust violation-drawing from theories of optimal punishment for torts-would be the consequent economic harm divided by the probability the violator will be held accountable. See Landes, supra note 108, at 657. Accordingly, any fine below the optimal amount translates into underdeterrence (the situation in which we currently find ourselves) and any greater amount translates into overdeterrence. The problem with this approach, however, arises in the situation of supposed overdeterrence. Tort theory lends itself to the possibility of overdeterrence because excessive tort penalties might deter socially efficient behavior (behavior in which a tortfeasor's benefits exceed the injury to a victim). But antitrust violations, by definition, are socially inefficient-if certain economic conduct is deemed to increase surplus, even if it injures identifiable parties in the marketplace, then it is not a violation of the Sherman Act. In the antitrust context, the problem of overdeterrence can only arise if meritless suits are successfully brought, a problem that effective judging can solve. Regardless of one's view of whether antitrust violations have an optimal fine, by all accounts it appears that the primary enforcement problem in antitrust is that of underdeterrence.
146. There is considerable uncertainty in the detection rate for cartels. See, e.g., Maurice E. Stucke, Morality and Antitrust, 2006 COLUM. BUS. L. REV. 443, 458 ("The number of cartels prosecuted annually could represent ten percent of all cartels operating today or ninety percent- nobody knows."). Stucke cites former Assistant Attorney General Douglas Ginsburg as estimating that "antitrust enforcers detected no more than ten percent of all cartels," id. at 457 n.35 (citing Sentencing Options: Hearing Before the United States Sentencing Commission (1986), in UNITED STATES SENTENCING COMMISSION: UNPUBLISHED PUBLIC HEARINGS 1986 4, at 15 (1988)), and an Organization for Economic Cooperation and Development ("OECD") estimate of "one in six or seven," id. (citing COMPETITION COMM., ORG. FOR ECON. COOPERATION & DEV., REPORT ON THE NATURE AND IMPACT OF HARD CORE CARTELS AND SANCTIONS AGAINST CARTELS UNDER NATIONAL COMPETITION LAWS 3, 13 (2002), available at http://www.oecd.org/dataoecd/16/20/2081831.pdf).
147. Robert H. Lande. Are Antitrust "Treble" Damages Really Single Damages?, 54 OHIO ST. L.J. 115. 117-18 (1993).
148. John M. Connor & Robert H. Lande, How High Do Cartels Raise Prices? Implications for Optimal Cartel Fines, 80 TUL. L. REV. 513, 522-23, 545-46 (2005).
149. Yuliya Bolotova, Cartel Overcharges: An Empirical Analysis 22, 44 (Sept. 15, 2006) (unpublished manuscript, available at http://ssrn.com/abstract= 931211).
150. See Daniel K. Tarullo, Norms and Institutions in Global Competition Policy, 94 AM. J. INT'L L. 478, 479-80 (2000) ("Reductions in tariff barriers and the evolution of genuinely global markets in many industries have helped create the conditions for the apparent increase in international cartel activity to its highest level in decades."). Daniel Karon has also noted that many market participants prefer to fix prices and await weak enforcement. Daniel R. Karon, Price Fixing, Market Allocation and Bid Rigging Conspiracies: How to Counsel Your Clients to Detect Violations and Inform You of Potential Claims, 25 AM. J. TRIAL. ADVOC. 241, 255 (2001).
151. Bolotova, supra note 125, at 38.
152. Ill. Brick Co. v. Illinois, 431 U.S. 720, 737 (1977) (suggesting that indirect purchaser suits would "add whole new dimensions of complexity").
153. Blue Shield of Va. v. McCready, 457 U.S. 465, 475 n.11 (1982) ("[T]he task of disentangling overlapping damages claims is not lightly to be imposed upon potential antitrust litigants, or upon the judicial system.").
154. Kansas v. UtiliCorp United Inc., 497 U.S. 199, 208 (1990) ("The direct purchaser rule serves, in part, to eliminate the complications of apportioning overcharges between direct and indirect purchasers.").
155. Ill. Brick Co., 431 U.S. at 730-31. Hostility to multiple recoveries was an underlying premise of the Illinois Brick decision. Id. at 731 ("[W]e are unwilling to 'open the door to duplicative recoveries.'") (quoting Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251, 264 (1972)). It is unclear, however, where the Court found the authority to prohibit multiple liability, and this is curious since all successful plaintiffs recover a multiple of their injury in the form of treble damages. The assertion in Standard Oil Co. about duplicative recoveries was made without analysis and without citation to a supporting authority. The Supreme Court has nonetheless reiterated in subsequent rulings that any standing rule should build off the premise that no antitrust violator should be punished twice for the same violation. UtiliCorp, 497 U.S. at 212 ("The Illinois Brick rule also serves to eliminate multiple recoveries.");
156. McCready, 457 U.S. at 474 (confirming with precedent that a risk of duplicative recovery was "unacceptable") (citing III. Brick Co., 431 U.S. at 730-31).
157. Ultimately, there is a functional justification for prohibiting duplicative liability. Duplicative liability within the modem, multilayered supply chain would provide a nearly endless number of plaintiffs with claims that could push nearly any defendant into bankruptcy. But this justification has no implications for limiting recovery for individual plaintiffs. Indeed, deterrence may be enhanced if additional damages are awarded to any given plaintiff-perhaps one who discovers the violation, is first to bring suit, or who undertakes the role of lead plaintiff. As much as a functional approach counsels against imposing duplicative liability against a given defendant, it likewise counsels in favor of flexibility in awarding multiple recovery to individual plaintiffs.
158. McCready, 457 U.S. at 475 n.11.
159. Harris & Sullivan, supra note 80, at 272-73. Responding to claims by Posner and Landes, supra note 78, at 615-21, that pass-on calculations would involve a complex analysis of supply and demand elasticities, Harris and Sullivan argued that such complexity would arise only in a short-run analysis and that "[b]ecause in the long run supply is likely to be perfectly elastic ... an estimate of elasticity of demand will rarely be required ...." Harris & Sullivan, supra note 80, at 294 n.61a.
160. Hovenkamp, supra note 114, at 940-41. The yardstick method is described in HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY: THE LAW OF COMPETITION AND ITS PRACTICE § 17.5b1, at 660-61 (2d ed. 1999) (explaining that "[adjustments must probably be made for differences in taxes and regulatory fees, costs of transportation, and different wage and salary rates. However, if these differences can be isolated and quantified, an expert economist or accountant should be able to produce a 'reconstructed' price that would have prevailed in the cartelized market if it had the same level of competition as exists in the yardstick market"). For a description of the before-and-after method, see id. § 17.5b2, at 661-66. Other scholars have developed alternative methods to isolate and quantify the antitrust harm that falls upon a direct purchaser even after some damages are passed-on to subsequent buyers. See, e.g., Frank Verboven & Theon van Dijk, Cartel Damages Claims and the Passing-on Defense (May 2007) (Working Paper, available at http://papers.ssrn.com/sol3/papers.cfm?abstract _id= %201024469) (deriving a method, relying on relatively easy-to-observe variables, of estimating the antitrust harms both to direct purchasers and to social welfare, including the damages resulting from lost output).
161. See, e.g., Group Health Plan, Inc. v. Philip Morris USA, Inc., 344 F.3d 753, 761-62 (8th Cir. 2003) (applying the yardstick method); Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768, 793-94 (6th Cir. 2002) (applying regression analysis, before-and-after, and yardstick methods); In re Microcrystalline Cellulose Antitrust Litig., 221 F.R.D. 428, 430 (E.D. Pa. 2004) (accepting before-and-after method); In re Indep. Serv. Orgs. Antitrust Litig., 964 F. Supp. 1454 (D. Kan. 1997) (accepting before-and-after method).
162. This was well-recognized by the Illinois Brick dissenters. See supra note 42; Ill. Brick Co., 431 U.S. at 759 (Brennan, J., dissenting) ("Reasoned estimation is required in all antitrust cases.").
163. A notable exception has been recent cases reviewing challenges to proposed hospital mergers. In this area of antitrust enforcement, courts have exhibited significant difficulty managing the complex determinations and have received substantial scrutiny from several commentators. See, e.g., Jennifer R. Conners, A Critical Misdiagnosis: How Courts Underestimate the Anticompetitive Implications of Hospital Mergers, 91 CAL. L. REV. 543, 562-70 (2003) (describing how courts have erred, inter alia, in defining product markets, defining geographic markets, and in underestimating market power);
164. Thomas L. Greaney, Night Landings on an Aircraft Carrier: Hospital Mergers and Antitrust Law, 23 AM. J.L. & MED. 191, 192 (1997) ("[C]ourts deciding hospital merger cases are asked to make exceedingly fine-tuned appraisals of complex economic relationships .... Like pilots landing at night aboard an aircraft carrier, courts are aiming for a target that is small, shifting and poorly illuminated.").
165. See also Cory S. Capps et al., Antitrust Policy and Hospital Mergers: Recommendations for a New Approach, 47 ANTITRUST BULL. 677 (2002) (critiquing the methods used by courts in hospital merger cases);
166. Peter J. Hammer, Questioning Traditional Antitrust Presumptions: Price and Non-Price Competition in Hospital Markets, 32 U. MICH. J.L. REFORM 727 (1999) (discussing the difficulties courts encounter when attempting to apply traditional antitrust principles to hospital mergers);
167. James Langenfeld & Wenqing Li, Critical Loss Analysis in Evaluating Mergers, 46 ANTITRUST BULL. 299 (2001) (noting errors courts have made using a critical loss analysis in merger cases);
168. Gregory J. Werden, The Limited Relevance of Patient Migration Data in Market Delineation for Hospital Merger Cases, 8 J. HEALTH ECON. 363 (1989) (illustrating the limited utility of patient migration date in antitrust analysis);
169. Matthew Reiffer, Note, Antitrust Implications in Nonprofit Hospital Mergers, 27 J. LEGIS. 187 (2001) (recognizing complexity of hospital mergers with respect to antitrust).
170. See generally Barak D. Richman, Antitrust and Nonprofit Hospital Mergers: A Return to Basics (Duke Law Seh. Sei., Tech. & Innovation Research Paper Series, Paper No. 15, 2007), available at http://ssrn.com/abstract=975152.
171. See supra notes 82-85 and accompanying text.
172. See Cavanagh, supra note 6, at 27-31, 33-34, 41.
173. Id. at 30 ("This proliferation of litigation of indirect purchaser cases involving a common nucleus of operative fact with cases pending in federal court has created a logistical nightmare for the courts.").
174. See Andrew I. Gavil, Federal Judicial Power and the Challenges of Multijurisdictional Direct and Indirect Purchaser Antitrust Litigation, 69 GEO. WASH. L. REV. 860, 863 (2001) ("[T]he artificial division of cases that now flows from Illinois Brick imposes unnecessary litigation burdens on the parties and leads to unjustifiable systemic inefficiencies, Ample ground should exist, therefore, to construct a consensus for procedural reform directed at facilitating more efficient treatment of substantively overlapping cases filed contemporaneously in multiple jurisdictions, state and federal.").
175. See ANTITRUST MODERNIZATION COMM'N, SUMMARY OF INDIRECT PURCHASER HEARINGS 1 (2005), available at http://www.abanet.org/antitrust/at-links/pdf/at-mod/ indirectpurchaserhearings.pdf ("Almost all of the speakers... viewed the current situation as entailing needlessly heavy costs and burdens on the defendants."). Illustrating the complexity, though without appreciating the irony, is the ABA's Indirect Purchaser Litigation Handbook, a nearly 400-page volume that describes how attorneys can initiate indirect purchaser suits and the unique litigation challenges they might encounter. Special attention is given to jurisdiction, choice of law, discovery, and class action proceedings, whereas only one chapter discusses the challenges of damage calculation. See generally ABA, INDIRECT PURCHASER LITIGATION HANDBOOK (2007).
176. This might be described as the mirror situation of a multiparty tort, in which responsibility for harm done to a plaintiff must be allocated to multiple defendants. A popular solution to the problem of joint tortfeasors is joint and several liability, in which a prevailing plaintiff recovers the full amount of injury from any tortfeasor while the defendants allocate damages among themselves through separate proceedings. See Lewis A. Kornhauser & Richard L. Revesz, Settlements Under Joint and Several Liability, 68 N.Y.U. L. REV. 427 (1993);
177. Lewis A. Kornhauser & Richard L. Revesz, Sharing Damages Among Multiple Tortfeasors, 98 YALE L.J. 831 (1989). Our proposal harnesses the wisdom of this approach and applies it to the antitrust context.
178. See supra Part II.B.
179. See supra Part III.
180. It goes without saying that the class action remains a point of contention and criticism. Reform efforts, however, have not rejected the value of consolidation, but instead try to filter out claims that have little legal or factual support. See, e.g.. Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4 (codified as amended in scattered sections of 28 U.S.C.).
181. Private Securities Litigation Reform Act of 1995 § 27, 15 U.S.C. S 77z-l (2000).
182. See AMC REPORT AND RECOMMENDATIONS, supra note 5, at 18.
183. See, e.g., CHARLES FRIED & DAVID ROSENBERG, MAKING TORT LAW: WHAT SHOULD BE DONE AND WHO SHOULD DO IT 89-90 (2003).
184. Although federal preemption of state law is always a politically sensitive matter, preemption of state indirect purchaser causes of action should be politically palatable so long as it is accompanied by a grant of indirect purchaser recovery at the federal level. Indeed, the impetus for the so-called Illinois Brick repealer statutes was to provide compensation to indirect purchasers. See supra notes 82-84 and accompanying text.
185. We propose a new consolidation mechanism, in part, because even if Illinois Brick were overturned, the methods currently provided by the Federal Rules of Civil Procedure to combine claims of multiple plaintiffs against a common defendant (under Rules 23 and 19) would fail to consolidate the claims of direct and indirect purchasers. Certification for class actions under Rule 23, for example, would likely fail for lack of a common question of fact because the plaintiffs at different levels of the distribution chain present different causal mechanisms of injury. The repeated failures of tobacco plaintiffs to certify classes highlight this issue. See, e.g., Barnes v. Am. Tobacco Co., 161 F.3d 127, 135 (3d Cir. 1998) (decertifying class where causation of tobacco-related injury varied among plaintiff smokers); id. at 143-44 n.19 (collecting cases). At the same time, joinder under Rule 19 is infeasible with large numbers of parties, such as one could expect from cases involving indirect purchaser pools that include end-users.
186. A common criticism of consolidated actions is that their size and potential payoff for plaintiffs might fuel a flood of meritless suits, and some might fear a similar flood from our proposal (especially when combined with repealing Illinois Brick's ban on indirect purchaser suits). We emphasize that courts would still have to apply the antitrust standing rules, such as the remoteness test articulated in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519 (1983). See supra note 65 and accompanying text. The Seventh Circuit demonstrated in Loeb Industries, Inc. v. Sumitomo Corp., 306 F.3d 469 (7th Cir. 2002), how, even after sidestepping Illinois Brick, courts may nevertheless deny standing on remoteness grounds. See supra note 69.
187. This is parallel to a "bonus system" for securities suits, in which the first plaintiff receives a reward meant to compensate costs of bringing the suit and to counteract the free-rider problem caused by class certification, collateral estoppel, and any other mechanism that would allow later parties to benefit from the first-mover's expenses. See, e.g., Van Vranken v. Atlantic Richfield Co., 901 F. Supp. 294, 299 (N.D. Cal. 1995) (holding incentive awards to class representatives as falling within the court's discretion, and outlining the factors for consideration).
188. See generally Theodore Eisenberg & Geoffrey P. Miller, Incentive Awards to Class Action Plaintiffs: An Empirical Study, 53 UCLA L. REV. 1303 (2006) (justifying incentive awards as compensation for the additional risks and costs borne by class representatives).
189. Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737, (codified as amended at 15 U.S.C. § 77z-1 (2000)). See John W. Avery, Securities Litigation Reform: The Long and Winding Road to the Private Securities Litigation Reform Act of 1995, 51 BUS. LAW. 335, 337-38 (1996) (explaining that one of the three prime motivations behind the Act was reforming securities class actions to better serve the interest of investors, rather than attorneys).
190. See also H.R. REP. No. 104-369, at 31-35 (1995) (Conf. Rep.),
191. reprinted in 1995 U.S.C.C.A.N. 730, 730-34 (describing the importance of measures enacted to better manage litigation, including a method for determining the "most adequate plaintiff").
192. Avery, supra note 154, at 375.
193. See also H.R. REP. NO. 104-369, at 33 (Conf. Rep.),
194. reprinted in 1996 U.S.C.C.A.N. 730, 732 ("Most often speed has replaced diligence in drafting complaints.");
195. John F. Olson, David C. Mahaffey & Brian E. Casey, Pleading Reform, Plaintiff Qualification and Discovery Stays Under the Reform Act, 51 BUS. LAW. 1101, 1104-07 (1996) (providing a brief history of the "race to the courthouse" tradition and its impact upon drafting PSLRA and describing frequency of hastily drafted and error-ridden complaints filed within days of a stock price drop and "professional plaintiffs" essentially on standby).
196. See H.R. REP. No. 104-369, at 32-33 (Conf. Rep.), reprinted in 1996 U.S.C.C.A.N. 730 ("Floor debate in the Senate highlighted that many of the 'world's unluckiest investors' repeatedly appear as lead plaintiffs in securities class action lawsuits. . . . Lead plaintiffs are not entitled to a bounty for their services. Individuals who are motivated by the payment of a bounty or bonus should not be permitted to serve as lead plaintiffs. These individuals do not adequately represent other shareholders - in many cases the 'lead plaintiff has not even read the complaint."). The conflicts of interest between counsel predisposed to accepting a settlement that is low but that adequately provides for fees, rather than a settlement that maximizes value for the plaintiff was well known to proponents of the PSLRA. Avery, supra note 154, at 372. The PSLRA deals with these by requiring that plaintiffs certify having reviewed and authorized the complaint, as well as recite that they did not purchase a security solely at the direction of their lawyer. See 15 U.S.C. § 77z-1(a)(2); Avery, supra note 154, at 375.
197. Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 STAN. L. REV. 497, 525-26 (1991) (describing one study which found that less than 5 percent of the securities litigations pending in 1987 ever went to trial, and a smaller study which found that 83 percent of securities cases filed in Dallas federal district court settled).
198. See also Mukesh Bajaj, Sumon C. Mazumdar & Atulya Sarin, Securities Class Action Settlements: An Empirical Analysis 9 (Nov. 17, 2000) (Working Paper, available at http://papers.ssrn.com/sol3/papers.cfm? abstract_id=258 027). Identifying an optimal plaintiff - one that can manage complex litigation and has incentives aligned with social preferences - is especially important in antitrust cases, where many antitrust actions follow an inquiry by the Department of Justice or the Federal Trade Commission. If private actions follow government investigations, rather than playing leading roles in detecting and punishing anticompetitive conduct, then the motives behind rewarding the swift are entirely undermined. For these reasons, it is wise to incorporate discretion in the selection of the plaintiff, rather than leaving it to a race.
199. See Private Securities Litigation Reform Act of 1995 § 27(a)(3)(B)(ii), 15 U.S.C. § 77z-1.
200. See also H.R. REP. NO. 104-369, at 32-35 (Conf. Rep.) (addressing the problems of "professional plaintiffs" and other class control concerns).
201. Private Securities Litigation Reform Act of 1995 § 27(a)(3)(A)(i).
202. Id.;
203. Id. § 27(a)(3)(B).
204. Id. § 27(a)(3)(B)(iii).
205. This mechanism would also be available for a private class action following a suit by the government. Since private claims often follow government antitrust victories, a mandatory class action would organize the claims and administer a settlement more swiftly and efficiently than the morass of parallel and competing suits that now follow a government conviction.
206. Our proposal also permits the possibility of allowing subclasses of plaintiffs to each have its own counsel and lead subplaintiff.
207. A distinction should be drawn between weighing the relative magnitude of claims as part of a balancing to determine the lead plaintiff at the start of litigation and the more precise allocation of damages that would come after a successful prosecution of a private enforcement action. In the first stage, the judge weighs a non-dispositive factor and selects who among several plaintiffs should serve as the lead plaintiff, a decision that would fall within that judge's discretion. A more rigorous allocation would be required for the subsequent allocation of damages.
208. These presumptions are not dispositive (that is, they are merely presumptions), and in selecting a lead plaintiff, the presiding judge maintains discretion to consider the many other factors that judges currently enjoy in selecting a lead plaintiff for PSLRA actions. Those considerations might include the quality of a potential lead plaintiffs counsel, the representativeness of that plaintiff for the other parties, and the likelihood of reaching a reasonable settlement. Like selections of lead plaintiffs under the PSLRA, these selections would eschew a formulaic approach and instead adopt a case-by-case balancing of these factors that can reward a plaintiff's initiative while also taking stock of potential plaintiffs' relative motivations and resources going forward.
209. Stephen J. Choi & Robert B. Thompson, Securities Litigation and Its Lawyers: Changes During the First Decade After the PSLRA, 106 COLUM. L. REV. 1489, 1505-06 (2006) (citations omitted);
210. James D. Cox & Randall S. Thomas, Does the Plaintiff Matter? An Empirical Analysis of Lead Plaintiffs in Securities Class Actions, 106 COLUM. L. REV. 1587, 1624 (2006) (finding that institutional investors increase the value of resulting settlements when serving as lead plaintiffs).
211. See supra Part III.C.
212. See Harris & Sullivan, supra note 80, at 337-38.
213. HOVENKAMP, supra note 134, § 17.5b1-2.
214. See cases cited supra note 135.