In an opinion that highlights the complexity of the modern antitrust landscape, the California Supreme Court recently held that defendants in an antitrust dispute brought under California’s Cartwright Act cannot argue that the indirect purchaser plaintiffs merely “passed on” any alleged overcharges and, thus, were not injured by the defendants’ alleged conspiracy.¹ California is the latest jurisdiction to consider the difficult questions that arise when an allegedly price-fixed product is purchased and sold multiple times between manufacturer and consumer.

When an entity is accused of anticompetitive conduct, several parties in the distribution chain have plausibly suffered an injury. Antitrust law organizes these parties into two categories: direct purchasers, who acquire the supracompetitively-priced good directly from the defendant, and indirect purchasers, who acquire the good from a non-defendant further down the distribution chain. A distribution chain may have several levels of indirect purchasers (such as a wholesaler that sells to a distributor, who sells to a retailer, who sells to a consumer), but there can be only one direct purchaser. The character of such markets creates two questions. First, can a defendant argue that the plaintiff was not injured because it merely “passed on” any overcharge? Second, do indirect purchasers have standing to sue for an alleged antitrust violation?

These questions are well-settled under federal law. In Hanover Shoe, the alleged price fixer asserted a “passing on” defense to Sherman Act liability, arguing that the plaintiff would have responded to the alleged overcharge by raising its prices and “passing on” part of the overcharge to subsequent purchasers and, as such, was not injured by the full overcharge.² The United States Supreme Court rejected the defendant’s ability to assert this defense.³ Nine years later, the United States Supreme Court held in Illinois Brick that indirect purchasers lacked standing to recover damages under the Sherman Act. Because antitrust defendants were precluded from arguing the “passing on” defense against direct purchasers, the Supreme Court reasoned that allowing indirect purchasers to recover damages would lead to multiple recoveries for the same alleged overcharge.⁴ In both Hanover Shoe and Illinois Brick, the Supreme Court relied heavily on the need to avoid complicated questions regarding the apportionment of damages between direct and indirect purchasers. ⁵

State antitrust laws, however, do not all follow Illinois Brick and Hanover Shoe. Twenty-eight states, the District of Columbia, and Guam permit at least some type of indirect purchaser claims to go forward under their antitrust regimes. A defendant in an antitrust action can often expect to defend against direct purchasers making a Sherman Act claim and against indirect purchasers asserting state law claims. The very complexity the United States Supreme Court hoped to avoid — apportionment of damages — is now necessitated by indirect purchaser standing under state antitrust statutes. In fact, due to slight variations in each state’s antitrust statute, the complexity of such litigation matters has been greatly exacerbated.

California’s legislature amended the Cartwright Act to expressly permit indirect purchasers to bring antitrust claims but did not address the applicability of Hanover Shoe’s “passing on” defense. This legislative silence was the key issue in Clayworth v. Pfizer, in which a group of retailers — intermediate purchasers in the distribution chain — sued manufacturers of pharmaceutical products, alleging that the manufacturers conspired to fix the prices of certain pharmaceutical products.⁶ No other members of the distribution chain filed suit. The manufacturers argued that the retailers had not been injured because any price increase would be passed on to consumers and health insurance companies.⁷ On summary judgment, the trial court found that the retailers had passed on 100 percent of the price increase and, based on the “passing on” defense, granted summary judgment for the manufacturers.⁸ The California Supreme Court reversed, adopting Hanover Shoe and holding that manufacturers remained liable even if the entire overcharge had been passed on.⁹

However, the California Supreme Court also recognized that the Cartwright Act’s Illinois Brick repealer would lead to duplicative recovery if the “passing on” defense is completely unavailable. Thus, the court noted that the “passing on” defense is permissible “to avoid duplication in the recovery of damages” when “multiple levels of purchasers have sued, or where a risk remains they may sue.”¹⁰  In Clayworth, unlike the typical modern antitrust matter, no direct purchasers or other indirect purchasers had brought suit, so the exception was not applicable.

Even where a state provides protection against double recovery, the court and litigants are required to apportion monetary awards between the various members of a distribution chain — a task so daunting that it led the United States Supreme Court to ban indirect purchaser suits altogether.¹¹ In answering one question, the Clayworth court has created several others.

For more information, please contact V&E partner Frank Brame. His extensive knowledge about indirect purchaser antitrust class actions makes him the go-to person for questions about this or other indirect purchaser antitrust claims. Visit our website to learn more about V&E's Antitrust practice. Get a .pdf of this issue of Antitrust News & Notes e-newsletter.