Tuesday, July 13, 2010
S.C.: ‘Pass-On’ of Overcharges No Antitrust Defense
By KENNETH OFGANG, Staff Writer
A defendant in an antitrust case generally cannot plead as an affirmative defense that the plaintiff has passed on all of the alleged overcharges to its customers and thus suffered no losses, the California Supreme Court ruled yesterday.
In a unanimous decision, the court reversed lower court decisions and held that there is ordinarily no pass-on defense under California’s Cartwright Act, just as there is none under federal law.
Justice Kathryn M. Werdegar wrote the opinion, and was joined by Chief Justice Ronald M. George, Justices Carlos Moreno and Marvin Baxter, and three temporary members of the court—First District Presiding Justice Ignacio Ruvolo, Third District Justice Ronald Robie, and Fourth District Justice Douglas Miller.
Justices Joyce L. Kennard, Ming Chin, and Carol Corrigan recused themselves.
The decision allows owners of retail pharmacies in the state to maintain a price-fixing suit against companies that make or distribute pharmaceuticals. The plaintiffs claim that the defendants conspired “to eliminate price competition and fix prices” in the U.S. market by, among other things, using government-controlled Canadian prices as a “floor” or minimum price for defendants’ U.S. products.
The defendants established through discovery that the method established by the plaintiffs to determine their prices, both for third-party health plans and for cash customers, assures that any additional costs resulting from the alleged conspiracy are passed on to the end payer. Since the plaintiffs were claiming no other damages, such as lost or delayed sales or other diminution in business, they suffered no recoverable losses, the trial judge ruled in granting summary judgment.
The First District Court of Appeal affirmed, holding that—although the U.S. Supreme Court rejected the pass-on defense under federal law in Hanover Shoe v. United Shoe Mach. (1968) 392 U.S. 481—the defense was viabile under the Cartwright Act.
The act provides, among other things, that a plaintiff who has been “injured in his or her business or property by reason of anything forbidden or declared unlawful by” the act may recover three times the “damages sustained” as a result of the violation. The Court of Appeal reasoned that where the plaintiff has recovered all of the alleged overcharges from its customers, it has sustained no damages as a result of the violation.
Werdegar, however, said the Supreme Court’s analysis in Hanover Shoe was correct.
The high court held there that a shoe manufacturer alleging that it overpaid for machinery because the defendant monopolized the market had a claim, even though the defense argued that whatever overpayments the plaintiff made had been passed on to the plaintiff’s customers.
The court said that “when a buyer shows that the price paid by him for materials purchased for use in his business is illegally high and also shows the amount of the overcharge, he has made out a prima facie case of injury and damage within the meaning of § 4” of the Clayton Act.”
A buyer who is illegally overcharged will be damaged, regardless of how it responds, the court reasoned—if it absorbs the loss, it will lose profits; if it passes the loss on, it will likely lose sales.
“As long as the seller continues to charge the illegal price, he takes from the buyer more than the law allows,” Justice Byron White, now deceased, wrote for the court. “At whatever price the buyer sells, the price he pays the seller remains illegally high, and his profits would be greater were his costs lower.”
The Cartwright Act’s use of the phrase “damages sustained,” Werdegar wrote, does not—as the defendants maintained—reflect an unambiguous intent to impose a stricter standard than federal law, so other sources must be considered. The justice concluded that more recent California legislation reflects a broad concern favoring plaintiffs in pass-on situations.
In 1976, she noted, federal lawmakers passed the Hart-Scott-Rodino amendments, granting state attorneys general to sue on behalf of the public for antitrust violations that might otherwise go unremedied because individuals might not suffer sufficient losses to justify litigation.
Addressing concerns that the lack of a pass-on defense would be unfair to defendants because they could be hit twice for the same damages—once by a direct purchaser which had passed its losses on to consumers and again by the state on behalf of those consumers—the legislation specifically barred any recovery for damages that another party had already recovered.
The following year, California enacted legislation implementing the federal amendments by authorizing the attorney general to bring the parens patriae suits allowed by Hart-Scott-Rodino, including a no-duplicative-damages provision like the one in the federal law.
The state legislation, Werdegar wrote, “thus took as its premise that under the Cartwright Act direct purchasers could themselves recover overcharges that might in theory have been passed on to indirect purchasers, that is, the Hanover Shoe rule.”
The jurist also noted that the Legislature later rejected the Supreme Court’s analysis in Illinois Brick Co. v. Illinois (1977) 431 U.S. 720. The high court held there that, just as a pass-on theory could not be used defensively, one could not be used offensively, that is, the state could not sue concrete block manufacturers for illegally increasing prices to masonry contractors, who passed them on to general contractors, who passed them on by overcharging the state.
That ruling, Werdegar noted, “evoked an immediate legislative response” in the form of a law tracking the language of the Illinois Brick dissent and barring application of the high court’s decision to the interpretation of the Cartwright Act.
Beyond those specifics, the justice said, the history of the Cartwright Act reflects certain “overarching legislative goals” with which the pass-on defense is inconsistent.
“From its inception, the Cartwright Act has always been focused on the punishment of violators for the larger purpose of promoting free competition,” Werdegar wrote. “...As the Cartwright Act’s primary concern is with the elimination of restraints of trade and impairments of the free market, we can and should select the damages rule most consistent with that focus.”
The case is Clayworth v. Pfizer, Inc., 10 S.O.S. 3897.
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