Crouch
v. Crompton Corp., 2004 NCBC 7
Morris
v. Visa U.S.A. Inc., 2004 NCBC 7
|
STATE OF NORTH CAROLINA NEW HANOVER COUNTY |
IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION |
|
AULEY M. CROUCH, III, on
behalf of himself and all others similarly situated, Plaintiff,
v. CROMPTON CORPORATION,
CROMPTON MANUFACTURING COMPANY, INC., formerly named in North Carolina as
Uniroyal Chemical Company, Inc., UNIROYAL CHEMICAL COMPANY LIMITED, FLEXSYS
NV, FLEXSYS AMERICA LIMITED PARTNERSHIP OF NORTH CAROLINA, BAYER AG, BAYER
CORPORATION, AND RHEIN CHEMIE RHEINAU GMBH, Defendants. |
02 CVS 4375 |
|
STATE
OF NORTH CAROLINA COUNTY
OF HARNETT |
IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION |
|
TIMOTHY
J. MORRIS, on behalf of himself and all others similarly situated, Plaintiff, v. VISA
U.S.A. INC. and MASTERCARD INTERNATIONAL, INC., Defendants. |
03 CVS 2514 |
{1} The
above captioned cases are before the Court on motions to dismiss pursuant to
Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. They are treated together because they both
present the same legal issues. The
first issue is whether indirect purchasers have standing under N.C.G.S. § 75-16
to sue for violations of the state antitrust laws. The Court holds, as it has before, that the decision of the Court
of Appeals in Hyde v. Abbott Laboratories, Inc., 123 N.C. App. 572, 473
S.E.2d 680 (1996), disc. rev. denied, 344 N.C. 734, 478 S.E.2d 5 (1996),
is controlling, and indirect purchasers do have standing to sue under North
Carolina’s antitrust laws. If indirect
purchasers have standing, the question becomes whether there are applicable
limitations on that standing. The Court
holds that indirect purchaser standing is not limitless; that there are
standing requirements that apply to indirect purchasers. Application of those standards to the
pleadings in each of these cases results in dismissal.
Lea, Rhine & Associates, PLLC by Christopher A.
Chleborowicz and Joel R. Rhine; Lerach Coughlin Stoia Geller Rudman &
Robbins LLP by Robert J. Gralewski, Jr. and Bonny E. Sweeney; The David Danis
Law Firm by Alexander E. Barnett, Michael J. Flannery and James J. Rosemergy
for Plaintiff Crouch.
Moore & Van Allen, PLLC by Joseph W. Eason;
O’Melveny & Myers, LLP by Benjamin G. Bradshaw, Richard
G. Parker and Ian Simmons for
Defendants Crompton Corporation, Crompton Manufacturing Company, Inc. and
Uniroyal Chemical Company Limited.
Womble
Carlyle Sandridge & Rice by Pressley M. Millen; Gibson, Dunn &
Crutcher, LLP by D. Jarrett Arp, James Slear and Daniel G. Swanson; Covington & Burling by Michael J.
Fanelli, William D. Iverson and Vijay Shanker for Defendants Flexsys America,
LP, Flexsys America Limited Partnership of North Carolina, and Flexsys NV.
Helms, Mulliss & Wicker, PLLC by Henry L. Kitchin,
Jr. and Bradley R. Kutrow; Jones Day by Thomas Demitrack, William V. O’Reilly
and J. Andrew Read for Defendants Bayer Corporation and Rhein Chemie
Corporation.
Hardison & Leone, L.L.P. by Kenneth L.
Hardison, Elizabeth A. Leone and Joseph
W. Osman; Susman Godfrey, L.L.P.
by Mark A. Evetts, Drew D. Hansen and Neal S. Manne; Markun Zusman Compton
& David, L.L.P. by Kevin Eng, David S. Markun, Edward S. Zusman; Friedman
& Shube by Noah Shube for Plaintiff Morris.
Ellis &
Winters, LLP by Richard W. Ellis, Stephen C.
Keadey, and Matthew W. Sawchak; Robinson, Bradshaw & Hinson, PA by
Everett J. Bowman, Mark W. Merritt and John R. Wester; Heller Ehrman White
& McAuliffe LLP by Stephen V. Bomse, David M. Goldstein and Rachel M.
Jones; Arnold & Porter LLP by Robert C. Mason for Defendant Visa U.S.A.
Inc.
Womble
Carlyle Sandridge & Rice by Pressley M. Millen; Paul Weiss Rifkind Wharton & Garrison, L.L.P. by Gary R.
Carney, Patricia C. Crowley and Kenneth A. Gallo for Defendant MasterCard
International, Inc.
I.
FACTUAL BACKGROUND IN CROUCH
{2} Plaintiff Crouch is an individual residing in New Hanover County, North Carolina. Plaintiff purchased four B.F. Goodrich tires (Advantage GT model # P195-70R14 90SM+S) for his automobile on October 19, 2002 from Sam’s Club of Wilmington. Plaintiff brings this claim individually and on behalf of all other persons who purchased tires, other than for resale, that were manufactured using the rubber-processing chemicals sold by Defendants since 1994.[1]
{3} Defendant Crompton Corporation (“Crompton”) is a Connecticut corporation with its principal place of business in Greenwich, Connecticut. Crompton is a global marketer and manufacturer of specialty chemicals, polymer products and processing equipment, which includes chemicals used for the processing of rubber and tires. Crompton’s actions have affected commerce within the State of North Carolina.
{4} Defendant Uniroyal Chemical Company Limited (“Uniroyal”) is a Delaware corporation with its principal place of business in Akron, Ohio. It is a wholly-owned subsidiary of Crompton and is responsible either independently or jointly with Crompton Manufacturing Company, Inc. for the manufacture, sale and/or distribution of rubber-processing products as part of its ordinary and customary business. Uniroyal manufactures several rubber-processing products including specialty products for tires and industrial rubber goods. Uniroyal’s actions have affected commerce within the State of North Carolina.
{5} Defendant Crompton Manufacturing Company, Inc., formerly legally named in North Carolina as Uniroyal Chemical Company, Inc. (“Crompton Manufacturing”), is a New Jersey corporation with its principal place of business in Greenwich, Connecticut. It is a wholly-owned subsidiary of Crompton and is responsible either independently or jointly with Uniroyal for the manufacture, sale and/or distribution of rubber-processing products as part of its ordinary and customary business. Crompton Manufacturing’s rubber-processing products include specialty products for tires and industrial rubber goods. Crompton Manufacturing’s actions have affected commerce within the State of North Carolina.
{6} Defendant Flexsys NV is a joint venture between Solutia, a United States company, and Akzo Nobel, a Netherlands company. Flexsys NV has its headquarters in Woluwe, Belgium.
{7} Defendant Flexsys America LP (“Flexsys”) is the United States subsidiary of Flexsys NV. Flexsys is a Delaware corporation with its headquarters located in Akron, Ohio. Flexsys NV is the world’s leading supplier of chemicals to the rubber industry. Flexsys’ actions have affected commerce within the State of North Carolina.
{8} Defendant Flexsys America Limited Partnership of North Carolina (“Flexsys NC”), the legal name in North Carolina of Flexsys America LP, is the United States subsidiary of Flexsys NV. Flexsys NC is a Delaware corporation with its headquarters located in Akron, Ohio.
{9} Defendant Bayer AG is a corporation organized and existing under the law of the Federal Republic of Germany and maintains its principal place of business in Leverkusen, Federal Republic of Germany. Bayer AG is the parent company of Bayer Corporation, the wholly-owned subsidiary that sells and markets rubber-processing chemicals in the United States.
{10} Defendant Bayer Corporation (“Bayer”) is a wholly-owned subsidiary of Bayer AG. Bayer has its principal place of business in Pittsburg, Pennsylvania, and is incorporated under the laws of Pennsylvania. Bayer develops, manufactures, sells and distributes a variety of pharmaceutical and chemical products, including rubber-processing products.
{11} Bayer develops, manufactures, sells and distributes its rubber-processing products through its Fibers, Additives and Rubbers Division. The Division is headquartered in Akron, Ohio. The Division manufactures rubber-processing chemical products which have a variety of differing roles in rubber-processing.
{12} Defendant Rhein Chemie Rheinau GmbH (“Rhein GmbH”) is a business organized under the laws of the Federal Republic of Germany with its principal place of business located in Mannheim, Federal Republic of Germany. Rhein GmbH, a subsidiary or affiliate of Bayer AG, manufactures, sells and distributes the relevant rubber-processing chemicals throughout the global market, including the United States.
{13} Defendant Rhein Chemie Corporation (“Rhein”), a New Jersey corporation and a wholly-owned subsidiary and/or affiliate of Rhein GmbH, is responsible for the manufacture, sale and/or distribution of the relevant rubber-processing products throughout the United States, including North Carolina.
{14} On September 26, 2002, inspectors from the European Commission’s Competition Division, assisted by officials from the Commission’s member states, carried out unannounced inspections at defendants’ European offices. According to a memorandum issued by the Commission on October 10, 2002, the stated purpose of the inspections was to “ascertain whether there is evidence of a cartel agreement and related illegal practices concerning price fixing for rubber chemicals.” (Am. Compl. ¶ 43.) On October 14, 2002, the Associated Press reported that Crompton, Bayer and Flexsys made press releases verifying that their respective companies were under investigation for alleged price collusion in rubber chemicals both by U.S. and European Union authorities.[2] On May 27, 2004, Crompton pled guilty to participating in a conspiracy to suppress and eliminate competition by maintaining and increasing the price of certain rubber chemicals sold in the United States and elsewhere during the period between July 1995 to 2001. The U.S. federal court imposed a fine of $50 million. On May 28, 2004, Crompton pled guilty to one count of conspiring to lessen competition unduly in the sale and marketing of certain rubber chemicals in Canada. The Canadian federal court imposed a sentence requiring Crompton to pay a fine of $7 million. On July 14, 2004, Bayer pled guilty to charges filed by the U.S. Department of Justice in Federal District Court in the Northern District of California and agreed to a $66 million fine for participating in an international conspiracy to fix prices in the rubber chemicals market.
{15} Plaintiff filed this action on November 5, 2002, only thirty days after the European investigation was announced, alleging violations of North Carolina’s Unfair and Deceptive Trade Practices Act (“UDTPA”), including N.C.G.S. §§ 75-1.1, 75-2, 75-5, 75-16, 75-16.1. Plaintiff alleges that defendants “entered into an agreement, arrangement, contract, combination, conspiracy and/or understanding that was intended to and which did have the effect of fixing, raising, stabilizing and maintaining the price for the relevant rubber-processing chemicals.” (Am. Compl. ¶ 40.) Plaintiff alleges that defendants’ “supracompetitive pricing” was reflected in the prices of automobile tires manufactured using these rubber-processing chemicals. (Am. Compl. ¶ 41.) Therefore, plaintiff alleges that consumers who purchased these automobile tires, not directly from defendants but rather from tire retailers, paid more than they would have in the absence of the alleged anticompetitive agreement. (Am. Compl. ¶ 55.) Similar suits have been filed in other jurisdictions that recognize indirect purchaser standing. Plaintiff seeks to represent only persons who purchased tires at retail.
{16} Direct purchasers have filed a nationwide class action lawsuit seeking to recover the alleged overcharge that is the subject of the state litigation. In re Rubber Chemicals Antitrust Litig., Master Docket No. C-03-1496 (N.D. Cal. (Judge Martin J. Jenkins)).
{17} Defendants have responded by moving to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted based upon plaintiff’s lack of standing to sue under North Carolina’s antitrust laws.
{18} The case was assigned to this Court by Order
dated April 19, 2004.
II.
Factual Background in Morris
{19} Plaintiff, Timothy Morris, is a resident of North Carolina. Plaintiff brings this contemplated class action on behalf of all North Carolina consumers who purchased goods from merchants who accepted Visa and/or MasterCard credit cards and debit cards during the four years preceding the filing of the Complaint.
{20} Defendant Visa U.S.A. Inc. (“Visa”) is a Delaware corporation. Visa’s principal place of business is San Francisco, California. Visa transacts business within the State of North Carolina. At all relevant times, Visa was a national bankcard association whose members included more than 6,000 banks.
{21} Defendant MasterCard International, Inc. (“MasterCard”) is a Delaware corporation. MasterCard’s principal place of business is Purchase, New York. MasterCard transacts business within the State of North Carolina. At all relevant times, MasterCard was a national bankcard association whose members included more than 6,000 banks.
{22} In October 1996, Wal-Mart Stores, The Limited, Sears Roebuck, Safeway, Circuit City, the International Mass Retail Association, the National Retail Federation, the Food Marketing Institute, Bernie’s Army-Navy Store, Auto-Lab of Farmington Hills, Burlington Coat Factory Warehouse, Sportstop, Payless Shoesource Shoes, Etc., the Coffee Stop, UCC Kwik Doc, Computer Supplies Unlimited, Denture Specialist, Inc./Geneva White D.M.D., Shark 3 Audio, 53, Inc., and Scrub Shop collectively filed a claim challenging the “Honor All Cards” rules of Visa and MasterCard that require all merchants accepting Visa and MasterCard credit cards to also accept their debit cards. The plaintiffs alleged that this requirement was a tying arrangement violating section 1 of the Sherman Antitrust Act, 15 U.S.C. §1. Plaintiffs further asserted that Visa and MasterCard attempted and conspired to monopolize the debit card market in violation of section 2 of the Sherman Act, 15 U.S.C. §2. Plaintiffs alleged that the defendants’ actions resulted in excessive fees to merchants for the debit card processing services. See In re Visa Check/MasterMoney Antitrust Litig., 192 F.R.D. 68 (E.D.N.Y. 2000) aff’d, 280 F.3d 124 (2d Cir. 2001), cert. denied, 536 U.S. 917 (2002).
{23} In February 2000, a plaintiff class of approximately four million merchants who have accepted Visa and/or MasterCard credit cards and therefore were required to accept VisaCheck and/or MasterMoney debit cards under the “Honor All Cards” rule was certified. Id. Oral arguments on motions for summary judgment were heard on January 10, 2003. On April 1, 2003, the federal court granted the merchants’ motion for summary judgment in part and denied it in part. The defendants’ motions for summary judgment were denied in their entirety. In addition, MasterCard’s motion for a severance was denied. See In re Visa Check/MasterMoney Antitrust Litig., 2003 U.S. Dist. LEXIS 4965, at *27 (E.D.N.Y. Apr. 1, 2003).
{24} On the day that opening statements were to occur, April 28, 2003, MasterCard agreed to settle with the plaintiff class. In re Visa Check/ MasterMoney Antitrust Litig., 297 F. Supp. 2d 503, 508 (E.D.N.Y. 2003). Visa agreed to settlement two days later, April 30, 2003. On December 19, 2003, the federal court issued an order providing final approval of the settlements. Pursuant to the settlement, merchants who accept Visa and MasterCard credit cards were free to reject Visa and MasterCard debit cards. In addition, Visa and MasterCard will pay more than $3 billion into a settlement fund to be distributed to the merchant class. Id. at 506-08.
{25} Plaintiff filed this action on December 31, 2003, alleging violations of North Carolina’s Unfair and Deceptive Trade Practices Act, N.C.G.S. § 75. Plaintiff asserts consumer antitrust claims that attack the manner in which the “Honor All Cards” rules of the MasterCard and Visa national payment systems are applied to merchants across the country. Plaintiff’s claim in this action is founded upon the same alleged “tying” conduct by Visa and MasterCard that was at issue in the federal merchant class antitrust action. (Compare Compl. ¶¶ 2-6, 27(m), 28-57, with In re Visa Check/MasterMoney Antitrust Litig., 192 F.R.D. at 71-73.) Plaintiff alleges that consumers paid higher prices for goods sold by the merchants bringing the claim in the federal action. Plaintiff alleges that because merchants were “compelled to pay supracompetitive prices,” merchants, in turn, passed along their extra costs to consumers by raising the price of goods. (Compl. ¶¶ 57-58.)
{26} Defendants have responded by moving to dismiss under Rule 12(b)(6) based on two grounds: first, that plaintiff lacks standing to sue under North Carolina’s antitrust laws; and second, that plaintiff seeks relief that would violate the Commerce Clause of the United States Constitution, which forbids states from regulating interstate commerce that requires uniform national regulation.
{27} The case was assigned to this Court by Order dated May 11, 2004.
III.
LEGAL STANDARD
{28} When ruling on a motion to dismiss under Rule 12(b)(6), the court must determine “whether, as a matter of law, the allegations of the complaint . . . are sufficient to state a claim upon which relief may be granted.” Harris v. NCNB, 85 N.C. App. 669, 670, 355 S.E.2d 838, 840 (1987). In ruling on a motion to dismiss, the court must treat the allegations in the complaint as true. See Hyde v. Abbott Labs., Inc., 123 N.C. App. 572, 575, 473 S.E.2d 680, 682 (1996). The court must construe the complaint liberally and must not dismiss the complaint unless it appears to a certainty that plaintiff is entitled to no relief under any state of facts which could be proved in support of the claim. See id.
IV.
{29} An
understanding of the issues in these two cases necessarily begins with
examination of the standing requirements under federal antitrust law. That examination begins with the study of
two cases, Hanover Shoe Co. v. United Shoe Machinery Corp., 392 U.S. 481
(1968), and Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). The interrelationship of those two cases is
best described by William Landes and Richard Posner in their seminal article: 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, 602-03 (1979) (footnotes omitted).
{30} The rule
governing indirect purchaser standing in federal antitrust cases has not
changed since Illinois Brick.
The fact that there has been no congressional or judicial repeal of the
rule indicates that the policy behind it has proven effective. That policy holds that the direct purchaser
suit is on balance a more effective instrument for enforcement of the antitrust
rule prohibiting price fixing than the indirect purchaser suit.[3] Under the federal scheme, where avoidance of
a double recovery is favored, the federal government has chosen the direct
purchaser suit as the most effective means of enforcing the antitrust laws,
particularly in price fixing cases.
{31} The
choice made in the federal system had the effect of preventing indirect
purchasers who were actually injured by a price fixing scheme from recovering
their damages. It was a policy decision
that was not well received in some states.
There were rational arguments that the decision was wrong from a policy
standpoint. Those arguments were made
effectively by Justice Brennan in a well-reasoned dissent in Illinois Brick. A minority of states chose to alleviate the
problems created for indirect purchasers by Illinois Brick by either
passing statutes (Illinois Brick repealer statutes) or interpreting
their existing statutes as permitting indirect purchaser standing under the
state antitrust law based upon some differentiation in language between the
state and federal statutes. For
example, the District of Columbia passed a statute[4]
which was modeled directly on Justice Brennan’s dissent in Illinois Brick. It specifically provides for indirect
purchaser standing and it adopts the “target area” test for standing mentioned
by Justice Brennan in his dissent.[5] It is a model for states desiring to create
a clear statutory framework for indirect purchaser cases.
{32} The
recognition of indirect purchaser standing by this minority of states created
an unusual situation. In federal price
fixing cases, direct purchasers were permitted to recover the artificially
inflated price and treble damages even though they may have passed on the
artificially inflated price to someone else in the distribution chain. They receive a windfall in some instances;
but that windfall is predicated upon the policies that the federal scheme was
(a) the most effective deterrent, (b) eliminated double recovery, (c)
eliminated extraordinarily difficult damage proof[6]
and (d) was economically rational.[7] When the minority states reacted by
repealing Illinois Brick, they created a situation which (a) restored
the ability of indirect purchasers to recover for injuries actually sustained
as a result of anticompetitive behavior, (b) added a redundant and less
effective deterrent, (c) condoned double recovery (trebled) against violators
and (d) created the potential for extremely difficult damage proof issues.
{33} Not
surprisingly, the state efforts to restore indirect purchasers’ ability to
recover for injuries sustained as a result of antitrust violations were
challenged, primarily on the ground that state statutes were preempted by the
federal scheme. That challenge was
directly rejected by the United States Supreme Court in California v. ARC
America Corp., 490 U.S. 93 (1989).
The Supreme Court held that states may allow an indirect purchaser to
sue under state antitrust laws.
When viewed properly, Illinois Brick
was a decision construing the federal antitrust laws, not a decision defining
the interrelationship between the federal and state antitrust laws. The congressional purposes on which Illinois
Brick was based provide no support for a finding that state indirect
purchaser statutes are pre-empted by federal law.
California v. ARC Am. Corp., 490 U.S. 93, 105-06 (1989).
This Court has previously noted the problems created
by this dual enforcement in Adams v. Aventis, S.A., 2003 NCBC 7, at ¶ 23
(No. 01CVS2119, Craven County Super. Ct. August 26, 2003)(Tennille, J.). The Court stated:
In 1995, the Section of
Antitrust Law of the American Bar Association published a Report of the
Indirect Purchaser Task Force outlining proposed legislative changes to address
the “indirect purchaser problem.” Report
of the Indirect Purchaser Task Force: Section of Antitrust Law American Bar
Association, 63 Antitrust
L.J. 993 (Spring 1995). The report
stated that the results of state Illinois Brick repealer laws are that:
(1) The full amount of the overcharge,
trebled, can be recovered by (i) direct purchasers who sue under federal law;
(ii) the customers of those direct purchasers who sue under state law; and
(iii) under most state Illinois Brick repealers, by indirect purchasers
at every other stage of distribution down the line.
(2) The overcharge that an indirect
purchaser can have trebled may be a multiple of the overcharge to the direct
purchaser because indirect purchasers can claim that their seller's markups on
the original overcharge are also inflated because of that overcharge.
(3) The direct purchaser cases can be
prosecuted in federal court and the indirect purchaser cases can be prosecuted
in state court(s). Indeed, the Supreme
Court seemed to encourage that kind of multiple litigation in ARC America
by broadly hinting to federal courts that they utilize pendent jurisdiction
principles for state law indirect purchaser claims.
(4) The results in the direct and indirect
purchaser cases need not be consistent.
The overcharge which is treated as the direct purchaser's in the federal
court can be treated as the indirect purchaser's in the state court. In fact, if indirect purchaser cases are
brought in several state courts, there may be inconsistencies in those
decisions.
Thus, defendants in horizontal price-fixing cases face not only the burden and expense of multiple treble-damage lawsuits, but also enormous potential liability—not just three, but multiples of three times the overcharge, if a lay jury finds liability. Few companies can afford to “roll the dice” on a jury verdict when the exposure is that high, no matter how innocent they believe they are.
Additionally, the current law
turns judicial economy—the principal reason for the decisions in Hanover
Shoe and Illinois Brick—on its head. Federal and state judicial resources are finite and
precious. It makes little sense to
permit, much less encourage, multiple litigation in federal and state
courts. It makes even less sense to
permit inconsistent judgments as to who bore the overcharge.
2003 NCBC 7, at ¶
23.
{34} Thus,
states may provide indirect purchaser recovery based upon state antitrust laws
even though (1) the result may and almost assuredly will be a double recovery
and (2) a preferable deterrent exists under federal law. It is clear then that the primary rational
for enforcement of the state antitrust laws is to provide a recovery for
indirect purchasers actually injured by antitrust violations. That goal should be kept in mind when
interpreting and applying the statute.
{35} The
inquiry into standing in federal antitrust cases does not end with Hanover
Shoe and Illinois Brick.
Those cases dealt only with apportionment of damages in price fixing
situations.
{36} The
Supreme Court specifically noted that its decision was not directed to
standing. It said:
Because we find Hanover Shoe dispositive here, we do
not address the standing issue, except to note, as did the Court of Appeals
below, that the question of which persons have been injured by an illegal
overcharge for purposes of § 4 is analytically distinct from the question of
which persons have sustained injuries too remote to give them standing to sue
for damages under § 4.
Illinois Brick,
431 U.S. at 728 n.7 (citation omitted).
{37} Since Illinois
Brick, the federal courts have addressed standing in other situations
involving indirect purchasers or persons indirectly injured by alleged
antitrust activity. The leading federal case on standing in situations not
involving price fixing is Associated General Contractors of California, Inc.
v. California State Counsel of Carpenters, 459 U.S. 519 (1983) (“AGC”).[8] In that case, the Unions sought damages
under section 4 of the Clayton Act. [9] They alleged that the employer group
defendant had coerced some of its members to enter into business relationships
with nonunion contractors and subcontractors, thus adversely affecting the
trade of the unionized firms and consequently the unions themselves.
{38} In holding that the Union was not a person injured by reason of a violation of the antitrust laws within the meaning of section 4 of the Clayton Act, the Supreme Court adopted a five factor standing test which it derived in part by looking at the standard applied in common law damage actions when the Clayton Act’s predecessor was originally passed in 1890.
{39} Significantly,
the Supreme Court rejected the argument made by both plaintiffs in these cases
that because the language in the statutes (section 4 of the Clayton Act and
Chapter 75) is broad and unrestricted, it covers any and every arguable injury
flowing from an antitrust violation.[10] In rejecting a limitless interpretation of
the language the Supreme Court said:
A
literal reading of the statute is broad enough to encompass every harm that can
be attributed directly or indirectly to the consequences of an antitrust
violation. Some of our prior cases have
paraphrased the statute in an equally expansive way. But before we hold that the statute is as broad as its words
suggest, we must consider whether Congress intended such an open-ended meaning.
AGC, 459
U.S. at 530 (footnote omitted).
{40} The Court then went on to hold:
As
this Court has observed, the lower federal courts have been “virtually
unanimous in concluding that Congress did not intend the antitrust laws to
provide a remedy in damages for all injuries that might conceivably be traced
to an antitrust violation.” Hawaii v. Standard Oil Co., 405 U.S. 251,
263, n. 14 (1972). Just last
Term we stated:
An antitrust violation may be expected to cause
ripples of harm to flow through the Nation’s economy; but “despite the broad
wording of § 4 there is a point beyond which the wrongdoer should not be held
liable.” [Illinois Brick Co. v.
Illinois, 431 U.S.], at 760 (BRENNAN, J. dissenting). It is reasonable to assume that Congress did
not intend to allow every person tangentially affected by an antitrust
violation to maintain an action to recover threefold damages for the injury to
his business or property. Blue
Shield of Virginia v. McCready, 457 U.S. 465, 476-477 (1982).
Id. at
534-35.
{41} The
Supreme Court found that there was no single bright line test that could be
applied in determining standing.
Rather, it required federal judges to evaluate the plaintiff’s harm, the
alleged wrongdoing by the defendant and the relationship between the two
according to five factors. The five
factors to be used by federal courts in determining standing as set forth in AGC
are: (1) whether the plaintiff is a consumer or competitor in the allegedly
restrained market, (2) whether the injury alleged is direct and a first hand
product of the restraint alleged, (3) whether there exists more directly
injured parties with motivation to sue, (4) whether the damage claims are
speculative and (5) whether the claims (a) risk duplicative recovery and (b)
would require a complex apportionment of damages.
{42} The
holding in AGC has been followed consistently in the federal
courts. See, Pocahontas
Supreme Coal Co. v. Bethlehem Steel Corp., 828 F.2d 211, 219 (4th Cir.
1987) (affirming dismissal because “though there obviously is a causal relation
between the conduct and harm as alleged, it is remote rather than direct”); Eagle
v. Star-Kist Foods, Inc., 812 F.2d 538, 539‑43 (9th Cir. 1987)
(affirming dismissal because plaintiffs “were neither consumers nor competitors
in the relevant market,” who alleged injuries derivative of others who also had
sued defendants); Henke Enters., Inc. v. Hy‑Vee Food Stores, Inc.,
749 F.2d 488, 489‑90 (8th Cir. 1984) (affirming dismissal because
plaintiff “was neither a competitor, participant, nor consumer within the
[allegedly restrained] market” and its alleged injury was “an incidental by‑product
of the conspirators’ claimed anticompetitive action”). Viewed in the broader context of standing
enunciated in AGC, Illinois Brick appears as a per se
disqualification of indirect purchasers in price fixing cases under application
of factors 2, 3 and 5. Illinois
Brick and AGC are logically consistent.
{43} If Hyde
is correct that the North Carolina statute created indirect purchaser standing
and if the courts of this state are required to interpret our antitrust
statutes consistently with federal law[11],
reconciling Illinois Brick and AGC in this state requires that
factor 3 be modified and that the application of factors 2 and 5 be limited by
the statutory recognition of indirect purchaser claims. The courts of this state may not deny
standing based upon Illinois Brick but must still determine standing
based upon relevant factors.
{44} “Standing
is a necessary prerequisite to a court’s proper exercise of subject matter
jurisdiction.” Neuse River Found.,
Inc. v. Smithfield Foods, Inc., 115 N.C. App. 110, 113, 574 S.E.2d 48, 51
(2002) (quoting Aubin v. Susi, 149 N.C. App. 320, 324, 560 S.E.2d
875, 878 (2002)). “The term
[‘standing’] refers to whether a party has a sufficient stake in an otherwise justiciable
controversy so as to properly seek adjudication of the matter.” Neuse River Found., 115 N.C. App. at
114, 574 S.E.2d at 51-52 (quoting Sierra Club v. Morton, 405 U.S. 727,
731-32 (1972)). Standing consists of
three elements:
(1) “injury in fact” -- an invasion of a legally
protected interest that is (a) concrete and particularized and (b) actual or
imminent, not conjectural or hypothetical; (2) the injury is fairly
traceable to the challenged action of the defendant; and (3) it is likely,
as opposed to merely speculative, that the injury will be redressed by a
favorable decision.
Neuse
River Found., 155 N.C. App. at 114,
574 S.E.2d at 52 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555,
560-61 (1992)) (emphasis added).
“The gist of standing is whether there is a
justiciable controversy being litigated among adverse parties with substantial
interest affected so as to bring forth a clear articulation of the issues
before the court.” Street v. Smart
Corp., 157 N.C. App. 303, 305-06, 578 S.E.2d 695, 698 (2003) (quoting
Texfi Industries v. City of Fayetteville, 44 N.C. App. 268, 269-70, 261
S.E.2d 21, 23 (1979), aff’d, 301 N.C. 1, 269 S.E.2d 142 (1980)). “Standing most often turns on whether the
party has alleged ‘injury in fact’ in light of the applicable statutes or
caselaw.” Neuse River Found.,
115 N.C. App. at 114, 574 S.E.2d at 52.
V.
{45} The
federal law and the issue of preemption of state antitrust laws by federal law
being clear, the Court turns to a review of the North Carolina experience in
indirect purchaser cases.
A.
{46} That
review begins with the statute and its history. The only appellate decision interpreting the statute is Hyde
v. Abbott Laboratories, Inc., 123 N.C. App. 572, 473 S.E.2d 680 (1996), disc.
rev. denied, 344 N.C. 734, 478 S.E.2d 5 (1996). As this Court has previously noted:
The
Hyde decision is the only North Carolina appellate decision dealing with
indirect purchaser standing. That case
was settled after the Court of Appeal’s decision and before review by the North
Carolina Supreme Court. In Hyde,
plaintiffs filed a class action against manufacturers of infant formula,
alleging violations of North Carolina’s antitrust laws. 123 N.C. App. at 573, 473 S.E.2d at
681. The purported class consisted of
ultimate consumers who purchased infant formula from parties other than the
manufacturer. Id. at 574, 473
S.E.2d at 681-82. The defendants filed
a motion to dismiss alleging that plaintiffs were indirect purchasers and
therefore lacked standing to sue under N.C.G.S. § 75-16. Id.
The Superior Court granted the motion to dismiss, and plaintiffs
appealed. Id.
The Court of Appeals reversed the Superior Court and found that under North Carolina’s antitrust statute, an indirect purchaser may sue a manufacturer for antitrust violations. The Court of Appeals based this finding upon a review of the plain language of N.C.G.S. § 75-16. North Carolina’s antitrust statute provides:
If any person shall be injured or the business of any person, firm or corporation shall be broken up, destroyed, or injured by reason of any act or thing done by any other person, firm or corporation in violation of the provisions of this Chapter, such person, firm or corporation so injured shall have a right of action on account of such injury done, and if damages are assessed in such case judgment shall be rendered in favor of the plaintiff and against the defendant for treble the amount fixed by the verdict. N.C.G.S. § 75-16 (1999).
The current version of N.C.G.S. § 75-16 was amended in
1969. Prior to the amendment, the first
sentence of the provision began: “If
the business of any person, firm, or corporation shall be broken up . . .
.” 1913 N.C. Sess. L. 66, 70. The Hyde court found it significant
that, in amending the statute, the legislature decided to add the phrase “if any
person shall be injured” to the beginning of the provision. 123 N.C. App. at 578, 473 S.E.2d at
684. The court found that this
evidenced an intent to expand the class of persons with standing to sue under
Chapter 75, and thus provide a recovery “for all consumers,” including indirect
purchasers. Id. at 577-78, 473
S.E.2d at 684. A review of the
legislative history also leads to the conclusion that the General Assembly
intended to create indirect purchaser standing to sue under the state antitrust
laws when it amended the statute. There
is simply no logical reason for the amendment other than the creation of
indirect purchaser standing.
In holding that indirect purchasers have standing to
sue under North Carolina antitrust law, the Court of Appeals specifically
declined to interpret the statute consistent with federal antitrust law. As originally enacted in 1913, the North
Carolina antitrust statute was modeled after federal antitrust law, codified as
Section 7 of the Sherman Act. See An
Act to Declare Illegal Trusts and Combinations in Restraint of Trade, Ch. 41, §
14, 1913 Sess. Laws 66. Section 7 of
the Sherman Act was recodified as Section 4 of the Clayton Act. Both federal and state law have been amended
throughout the years; however, the language of the North Carolina statute has
remained similar to the language of the Clayton Act.
Bruggers v. Eastman
Kodak Co., 2000 NCBC 3, at ¶¶ 5-8
(No. 97CVS11278, Wake County Super. Ct. March 17, 2000) (Tennille, J.).
{47} This
Court has previously held that unless and until Hyde is overruled by the
Supreme Court or new legislation is passed, this Court is bound by the decision
in Hyde to the extent that it holds that indirect purchasers have
standing under the North Carolina antitrust laws. See, Bruggers, 2000 NCBC 3, at ¶ 17; Adams, 2003
NCBC 7, at ¶ 8; MJM Investigations, Inc. v. Microsoft Corp. (No.
00CVS4073, Wake County Super. Ct.; No. 00CVS1246, Lincoln County Super. Ct.,
N.C. Aug. 2, 2004) (Tennille, J.) (Order Approving Settlement). In Hyde, the Court of Appeals was
only asked to consider the question of whether the statute provided indirect
purchaser standing. It was not called
upon to delineate the scope and breadth of standing under the statute.
{48} Since Hyde
was briefed and argued there have been several developments which might have
impacted the scope, if not the actual outcome, of that decision. Those developments demonstrate that the
landscape upon which these types of claims are viewed has changed significantly
since Hyde was decided.
{49} First, in
June 1996 the General Assembly ratified a bill entitled “An Act to Revise the
Statutes Regarding Antitrust Law to Ensure That These Provisions Are Internally
Consistent and Consistent With Federal Antitrust Laws.” Act of June 3, 1996, ch. 550, 1995 N.C.
Sess. Laws 550 (“1996 amendments”).
That legislative history is important for two reasons. First, if the General Assembly had desired
to change the statute to provide for an Illinois Brick/Hanover Shoe
limitation, it could have done so then.
It did not, and it has done nothing to change the law since the Hyde
decision. Second, and equally
important, the General Assembly signaled a clear intent for the state courts to
follow federal decisional guidance in interpreting and enforcing state
antitrust laws. Clearly, counsel for
the parties did not bring the 1996 amendments to the attention of the Hyde
court.[12] The statutory direction to follow federal
guidance has a bearing on this Court’s decisions in these two cases, requiring
the Court to reconcile the indirect purchaser standing statute with the federal
standing requirements enunciated in AGC.
{50} Second, a
track record is available which provides information not available to the Hyde
court.[13] The track record to date establishes that
state indirect purchaser cases are generally parasitic. They are not self-generating or supporting
but almost always are dependent on some triggering federal action for their
genesis. The track record also
establishes that these cases pose significantly complex proof issues both as to
damages and liability.[14] The track record establishes that they can
in fact result in double recovery.[15] That same track record discloses that these
types of cases are difficult to administer from a settlement standpoint and
that the complexities and administrative costs and difficulties result in
settlements that are something less than sterling from the consumer’s point of
view.[16] None of that information was available to
the court in Hyde. This Court
has previously pointed out the problems with settlement of these kinds of
cases. In approving the Microsoft
indirect purchaser class action settlement, the Court noted:
There is no definitive decision from the North
Carolina Supreme Court ruling upon the issue of indirect purchaser standing in
North Carolina, nor is there a clear legislative history. Accordingly, every plaintiff argues that
there is indirect purchaser standing, and every defendant argues that there is
no standing under North Carolina law.
The stakes are almost always too high for either side to risk trial and
an appeal. Further, numerous issues
flowing from indirect purchaser standing remain unanswered. For example, who has the burden of proof on
pass-through issues, and what must be shown?
How indirect can the purchaser be? Who has the burden of showing that an
indirect purchaser did not pass through the price increase to another consumer? Are there reliable means to determine pass
through and the amount thereof? The
answers to these questions dramatically affect liability and the potential for
recovery. It is no surprise that
neither plaintiffs lawyers nor defendants have wished to incur the expense of
trial and appeal which would be necessarily incurred in getting the answers to
these questions. It is likely that more
than one trial would be required to get all the required answers.
Additionally, there were significant questions
concerning the application of the law of damages and how damages were to be
determined in this case. The federal
case which spawned this and other indirect purchaser cases was not a price
fixing case. It involved anticompetitive
behavior and not price fixing. The cost
of Microsoft products at issue had decreased relatively speaking over the time
in question. While there had been a
determination in the federal action that Microsoft had a monopoly, there was no
finding that it had used that monopoly to artificially increase prices. Proving damages by pass through of
artificially inflated prices would have raised numerous novel questions of
law. Proving damages to indirect
purchasers by anticompetitive actions (which may have included artificially
deflated prices) would raise a whole host of other issues for which there is no
statutory or case law guidance.
In short, the process of trying this case and going
through an appeal and possible retrial meant that the case would not be finally
resolved for at least four or five years.
Final judgment would have been entered some ten years after the alleged
damages were incurred. For reasons
explained more fully below, that time lag was a significant issue.
While there is a possible philosophical argument that
this uncertainty has a salutary effect in promoting settlement of cases, this
court does not believe it is the function of the law to create ambiguity and
uncertainty. If consumers have a cause
of action they should be entitled to full recovery, not a compromise
amount. On the other hand, if no cause
of action exists or damages are limited to direct pass through of artificially
inflated prices, businesses ought not to have to pay for unfounded claims even
if they are compromised. Under the
present system, only the lawyers really benefit from the uncertainty. One of their clients is paying an
unnecessary price.
. . . .
Two factors are critical to the Court’s decision to
approve the terms of this settlement affecting purchasers of Microsoft
products—timing and purchaser identification.
Most indirect purchaser cases involve common problems—how to identify
the class members and distribute small amounts of money to them. This case is no different. Plaintiff’s counsel and Microsoft have
represented to the Court that a means of identifying all consumers who
purchased the software at issue does not exist and cannot be created. Thus, there will be a claim process of some
sort no matter the outcome of settlement or trial. As counsel for one of the interveners has suggested, even in cash
refund cases, the claims process is abysmally ineffective, with only
single-digit percentages of potential beneficiaries making claims. It thus appears to the Court that there will
have to be a claims process no matter the outcome. If the case were tried and some amount awarded for damages to
purchasers of specific products, a mechanism would have to be put in place for
identification of products purchased, claims and payment. If that process were to be put in place
three to five years from now and it covered products purchased in the late
1990s, it is unlikely that the claims process would result in any significant
payout. Most of these technology
products will have been replaced well before any claims process begins. If the funds were not paid out, Microsoft
would get to keep the money. Purchasers
would be required to prove purchases which occurred many years before the claim
process begins. That will be difficult
enough now, and perhaps impossible years from now. Settlement now, while there is some prospect that purchasers will
have records of their purchases, is far more beneficial to the class. Here, most of the purchasers are businesses
that arguably have better records of their purchases. For consumers, the settlement has the benefit of not requiring
proof of purchase for smaller claims.
The combination of the more current claim process and the cy pres component
of the settlement make acceptance of the coupon aspect of the settlement
acceptable, even if it is not the most desirable process. Given the rapid advancements in technology,
it is also likely that computer owners will make purchases of new hardware and
software, making the coupons more valuable than they would be for products not
likely to be replaced.
MJM Investigations, Inc. v. Microsoft Corp. (No. 00CVS4073, Wake County Super. Ct.; No. 00CVS1246, Lincoln County Super. Ct., N.C. Aug. 2, 2004) (Tennille, J.) (Order Approving Settlement).
{51} Third, there
are cases from other indirect purchaser states which provide some guidance with
respect to limitations on standing. The
case law has evolved from interpretations of state statutes to determine if
they provide for indirect purchaser standing (as happened in Hyde) to a
more detailed examination of standing requirements. Not unexpectedly, the far reaches of the claims against Visa and
MasterCard in the various indirect purchaser states have prompted some of that
evolution.
{52} At least
eight other courts have rejected standing for plaintiffs with claims identical
to those presented in the Morris case.
Each of those states recognizes indirect purchaser claims. In South Dakota the court simply dismissed
the case without detailed explanation.[17] In North Dakota the plaintiff’s case was
dismissed with the holding: “As ‘non-purchasers’ of defendants’ debit card
services to merchants, the Court believes that plaintiffs lack standing to sue
for the alleged restraint of trade in such services. Their alleged injury is simply too remote.”[18]
{53} In
Michigan[19] the trial
court applied the five AGC factors directly in dismissing similar
claims, finding that each failed to support standing. Significantly, the Michigan court rejected an argument similar to
that made by plaintiffs in these two cases that the broad language of the state
statute trumped application of the AGC factors. In addition, the court found that plaintiff
was not an indirect purchaser under the statute.
{54} In
Minnesota the courts have also applied AGC factors in determining
standing for indirect purchasers even though Illinois Brick was not
applied to preclude indirect purchaser claims.
In a well-reasoned opinion in the Gutzmiller[20]
case, the court applied factors 1, 4 and 5 under AGC in denying standing
to plaintiffs under the Minnesota statute, which is similar to North Carolina’s
antitrust law.
{55} In New
York, the Commercial Court in Ho[21]
rejected standing for plaintiffs under circumstances identical to the Morris
case. The court applied several of the AGC
factors in determining that the plaintiffs lacked standing under New York
antitrust laws.
{56} In
California the trial judge hearing the consolidated cases against Visa and
MasterCard dismissed all the claims arising under the Cartwright Act, Cal. Bus.
&. Prof. Code § 16720, et seq., applying the AGC factors to
find no standing. The court also held
that plaintiffs were neither direct nor indirect purchasers of card services.[22]
{57} In
Nebraska, the trial court applied the five AGC factors in dismissing the
identical claims by plaintiff.
Specifically, the court held that the plaintiff failed to satisfy
factors 2 and 3 under AGC. The
court also held that the plaintiff was not an indirect purchaser within the
scope of the state statute, which expressly grants standing to indirect
purchasers.[23]
{58} In Maine
the trial court rejected standing for the plaintiffs under an application of
the AGC factors. The court held
that factors 3, 4 and 5 particularly weighed against standing.[24]
{59} In
Superior Court in Buncombe County, North Carolina, Judge Dennis Winner
dismissed the plaintiff’s indirect purchaser claim, which was virtually
identical to the claim in Crouch, stating:
It is the opinion of the undersigned that notwithstanding the enactment of the amendment in 1996, the Hyde decision is still the law of this State with respect to the issue of suit by an indirect purchaser. Nevertheless, this Court believes that the General Assembly never intended that the antitrust laws of this State be used in the manner in which the Plaintiff has attempted in this case, and that this case is therefore distinguishable from the Hyde case. To rule otherwise would put this Court in an impossible position of attempting to determine whether the alleged price-fixing by an oligopoly of an ingredient used to make tires had anything to do with the price paid by the Plaintiff when he bought the tires. This Court believes that without some allegation and proof that the tire manufacturers themselves were an oligopoly and were fixing prices, that it would be impossible to show the price the Plaintiff paid was not set by the normal laws of supply and demand in our open economic system, and that even if it were possible to show that, there would be no way for the Court to, in any fair or just way, determine an amount the Plaintiff was damaged.
Therefore, it is the opinion of this Court that the General Assembly could not have intended that our Antitrust Statue be used by an indirect purchaser of tires against the manufacturers of an ingredient placed in those tires.
Weaver v. Cabot Corp., No. 03CVS04760 (Buncombe County Super. Ct., N.C. Mar. 29, 2004) (Winner, J).
B.
{60} A review
of indirect purchaser cases in North Carolina is informative. The Court does not believe the North
Carolina experience differs substantially from the national experience. State indirect purchaser cases have common
characteristics. They are seldom sui
generis. More commonly they
originate after a federal triggering event.
Those triggering events include a guilty plea to federal price fixing, a
class action suit by direct purchasers, or notice of a settlement of antitrust
claims with private plaintiffs or the Department of Justice. Morris is an excellent example. Sometimes only the announcement in an SEC
filing that there is an investigation underway will trigger suit. The Crouch case is an excellent
example. Almost all of the cases are
brought as class actions.[25] Discovery tracks the federal action
permitting class counsel to piggyback on the work of the government or counsel
for the direct purchasers. Both
plaintiffs and defendants have a vested interest in seeing the federal action
proceed first. Cases are filed in most
if not all states having indirect purchaser standing, frequently by the same
lawyers. The cases are seldom, if ever,
tried. They get settled far short of
trial.[26] Often and not unexpectedly, the settlements
in the various indirect purchaser standing states track each other
closely. The Microsoft case is
an excellent example. Sometimes the
state and federal actions are settled together.[27] The Court is unaware of any case in which
the settlement reflected treble damages.
Rather, most settlements are less than a whole recovery of the alleged
overcharge and are not particularly satisfying from the perspective of the
consumer class member. Cy pres
settlements are not uncommon since the difficulties inherent in distributing
tiny amounts among large numbers of consumers are daunting and expensive. The settlement in Long v. Abbott
Laboratories, 1999 NCBC 10 (No. 97CVS8289, Mecklenburg County Super. Ct.
July 30, 1999)(Tennille, J.) is an excellent example. The North Carolina cases mirror the national characteristics.
{61} This
Court has presided over a number of class action settlements involving indirect
purchaser claims, beginning with Long v. Abbott Laboratories. That case is instructive for a number of
reasons. It was parasitic in the sense
that it was filed after a federal direct purchaser antitrust case was filed and
discovery consisted of following discovery in the federal case. Similar cases were filed in ten other states
by the same counsel appearing in North Carolina. Fortunately for the plaintiffs, a class action settlement of the
various state claims was reached prior to trial of the federal action. The federal case was decided adverse to the
plaintiffs, and no antitrust violations were found. Since a settlement agreement had been reached, it was enforced. The agreement provided for a settlement fund
of approximately $9 million for North Carolina residents of which class counsel
sought approximately twenty-five percent.[28] Since the settlement could not be
distributed to the class, which consisted of all North Carolinians who
purchased a prescription drug at a retail drugstore, a cy pres fund for
people who could not afford their medications was created. Class members received nothing, and the
defendants[29] paid a cost
of litigation settlement although no underlying claim was ever proved.
{62} In Bruggers,
the state claim was filed after federal triggering events, including a
federal action. 2000 NCBC 3, at ¶
15. Claims were filed in other indirect
purchaser states.[30] The defendants were alleged to have fixed
the price of x-ray film. The class
consisted of all consumers of x-ray film in North Carolina. The problems created by the great variety of
purchasers and the number of distribution chains made settlement
difficult. In the end, a settlement
fund of approximately $200,000 was created and divided among claimants on a two
fund basis. One fund went to purchasers
based upon the pro rata amount of film they purchased and the other fund
provided one lump sum payment to anyone who filed a claim, determined per
capita based on the number of claims.
In total, 116 claimants sought recovery through the settlement fund. However, only 100 claims were found valid. Potential claimants numbered in the
thousands. In this instance, money
actually went to class members although the payment was small and the cost of
administration high. Class counsel
sought and obtained a reasonable fee based upon the amount recovered for the
class. Counsel for both sides urged the
Court to approve the settlement based upon the uncertain state of the law in
North Carolina and the difficulty of proof involving so many different
purchasers and distribution methods.
The pass through issues were extremely difficult, including questions of
whether hospitals absorbed the cost or passed it on to patients and insurance
companies and whether the dentist or patient ended up paying the cost for
dental x-ray film. The Court is
convinced that the vast majority of class members declined to take advantage of
the settlement because the dollar amount was not worth the effort required by
the claims process.
{63} The
Court’s most recent experience has been in the settlement of indirect purchaser
claims against Microsoft.[31] Again, the action was filed after a federal
triggering event, the determination in the government’s federal case of abuse
of monopoly power by Microsoft.
Lawsuits were filed in numerous states and discovery coordinated with
federal actions by direct purchasers.
The direct purchasers recovered little in the federal action, and their
counsel intervened in the state actions to try to obtain some of the attorney
fees in the state actions even though they had no agreements with local counsel
and had made no appearances in the cases.
The settlement was complicated and had a significant cy pres
component.[32] Counsel for the plaintiffs and Microsoft
urged approval of the settlement over significant objections based in part on
the complicated proof of damages and the uncertain state of the North Carolina
law. Like Morris, that case did
not involve allegations of price fixing among competitors.
{64} The Court
is aware of other cases in this state.
A class action settlement was approved in an alleged price fixing scheme
involving vitamins. Those cases
followed guilty pleas to federal criminal charges. That case was not before this Court, but a number of large hog
farmers opted out of what they believed was an inadequate class settlement and
filed their own indirect purchaser actions.
This Court ruled that they had standing.[33] The defendants declined the Court’s
suggestion to seek appellate review of that decision, and those cases have
settled without necessity of court approval since they were individual and not
class actions. Another case involving
price fixing of monosodium glutamate products has been stayed in this Court
pending a global settlement covering the federal claims and all state indirect
purchaser claims.[34] Such settlements are preferable, but
rare. They produce a more rational
allocation of the liability fund.
{65} The Court
is not aware of any North Carolina class action that did not have a federal
triggering event. The Court is not
aware of any indirect purchaser case in North Carolina that has proceeded to
trial, presumably because there is a federal triggering event establishing
liability. In each case before this
Court, the argument is made that the case must be compromised because the proof
of damages is difficult and uncertain.
Such arguments lead to a question of whether standing is
appropriate. Settlements are to be
encouraged, but they should have some basis in reality, and class counsel
should be prepared to show the court more than the simple fact that the issues
are difficult. That preparation
undoubtedly requires some time and expense on the part of class counsel. Some investigation before rushing to the
courthouse after a federal triggering event might generate better results or
prevent dismissal on a challenge to standing.
VI.
{66} The
following policy considerations are relevant in deciding the standing
requirements in indirect purchaser cases in North Carolina.
{67} If Hyde
is correct, the General Assembly intended for persons actually injured
to be able to recover for injuries resulting from violations of the state
antitrust laws.
{68} The
General Assembly has directed the state courts to follow federal guidelines in
determining standing.
{69} There is
already an adequate deterrent to violation of the antitrust laws in the federal
system. Accordingly, the focus of state
law should be recovery for those actually injured: i.e., victim
compensation.
{70} State
indirect purchaser standing creates the prospect of double recovery, both as
between direct and indirect purchasers and between indirect purchasers at
different levels in the distribution chain.
Double recovery is not favored, and where, as here, it is permitted
between direct and indirect purchasers, it should be narrowly construed to
ameliorate the adverse consequences.
{71} Indirect
purchaser cases are expensive, inefficient and low-yield for consumers. The cost of obtaining information relevant
to pass through of added costs from antitrust violations and investigating the
pricing decisions made in the distribution chain is high. Apportionment among various tiers in the
distribution chain involves extremely difficult problems of economic analysis
and measurement. The practical difficulties
of estimating both supply and demand elasticity at any one level and then over
and among multiple tiers in the distribution chain results in speculative
damage estimates. From an economics
perspective, indirect purchasers face negligible price increases in comparison
to direct purchasers.[35] Apportionment results in added cost of
litigation and uncertainty. The actual
recovery for class members in consumer class actions is relatively small and is
frequently outweighed by the cost of administration and attorney fees. The yield is low given the potential expense
of litigation. That is one explanation
for the settlements which do not reflect actual injury as much as the costs of
litigation.
{72} There is no
single bright line test that works in every case. Each standing case must be decided based on its own factual
situation.
{73} Given
those policy considerations, the decision of the Court of Appeals in Hyde,
the developments since Hyde, the history of the amendment of the statute
and the subsequent directions from the General Assembly to follow federal
guidelines, and the clear federal approach to standing, the Court believes that
the North Carolina courts would apply a multifactor test to determine standing
in indirect purchaser cases. The
requirements would recognize indirect purchaser standing, but engraft upon the
statute the requirements of standing enunciated in AGC, modified to
recognize the right to recover for injury created by statute for indirect
purchasers. The factors would include:
1.
Whether the plaintiff
is a consumer or competitor in the allegedly restrained market. This inquiry
focuses on the market the alleged restraint was designed to impact and the
intent of the actor in engaging in the restraint. One key question is whether the plaintiff claims injury in a
market collateral to the market in which the alleged restraint took place. This factor recognizes that the antitrust
laws are designed to see that customers in the relevant market get the benefit
of price competition. This factor would
have supported standing in Hyde.
2.
The directness of the
impact on the plaintiff. This factor is modified to eliminate the
restriction of Illinois Brick against indirect purchaser standing. Being an indirect purchaser does not
preclude standing. However, the causal
connection between the act and the claimed injury cannot be too remote. Purchasers in the direct chain of
distribution are more likely to be able to show sufficiently direct injury than
those outside the chain of distribution.
Purchasers who buy the product which is the subject of the restraint are
more likely to be able to show sufficiently direct injury than those who
purchase a product with a component which is the subject of the restraint. Purchasers of products whose manufacture was
impacted by the restraint face significant hurdles showing sufficiently direct
impact. Within the chain of distribution,
the relative positions of the purchaser and the actor can be significant, depending
on the length and complexity of the distribution chain. Even though a purchaser is removed from the
direct restraint, he or she may still show direct injury. See Blue Shield of Va. v. McCready,
457 U.S. 465, 478-81 (1982). This
factor would have supported standing in Hyde.
3.
Whether there exist
other indirect purchasers in the distribution chain who are more directly
impacted by the alleged violation. The nature of the market is significant
here. Courts must look at the nature of
the product and the market for the product as well as the chain of distribution
to determine the likelihood of direct pass through of the cost of the restraint
or inflated price. The nature of the
restraint must also be considered.
Double recovery among indirect purchasers should be avoided. This factor would have supported standing in
Hyde where the distribution chain was short.
4.
The speculative
nature of the damage claims. As damage claims move from direct to
indirect and the distribution chain becomes more complex, the possibility of
factors intervening to affect causation and price multiplies, and claims become
more speculative. It is appropriate for
purposes of determining indirect purchaser standing “to consider whether a
claim rests at bottom on some abstract conception or speculative measure of
harm.” McCready, 457 U.S. at 475
n.11. In McGready the Court
noted that the courts were required to be cautious when dealing with
speculative, abstract and impractical damage theories. Id.
This factor would not have prevented standing in Hyde. This factor focuses on sound economic
analysis. Important factors would
include reliable demand and supply curve studies and sufficient regression
analysis to eliminate other factors in pricing.
5.
The risk of
duplicative recovery and danger of complex apportionment of damages. While these
factors are limited by the General Assembly’s creation of indirect purchaser
standing, they should not be totally eliminated when considering the state
claims. The courts still have the same
interest in keeping the scope of a complex antitrust trial within judicially
manageable limits. AGC, 459 U.S.
at 543. The factors are simply taken
down a level and the Hanover Shoe/Illinois Brick restrictions
eliminated. State cases may present apportionment
issues which are simply too complex and for which there exists no measure of
recovery which is not speculative. It
is clear that the General Assembly did not intend that every purchaser in the
distribution chain have a right of recovery or that there be duplicative
recovery among indirect purchasers.
Such an interpretation would be contrary to the clear guidance to follow
federal precedent and harmonize state antitrust law with federal law. Rather, it should be clear that the General
Assembly intended that those who can show with some degree of certainty that
they were directly impacted by the alleged acts in restraint of trade should be
able to recover even though they are indirect purchasers. The courts must be cognizant that the
problems between direct and indirect purchaser cases replicate themselves in
state indirect purchaser cases where there are multiple levels in the
distribution chain and multiple distribution chains. There should only be one fund constituting the amount of the alleged
overcharge to North Carolina residents, and the courts must guard against
multiple liability for the fund and prejudice to absent victims or non-class
members. The complexity of the
distribution chain and the variety of consumers in Bruggers highlight
the issues this factor would implicate.
As the Supreme Court noted in AGC and Illinois Brick,
massive and complex damages litigation undermines the effectiveness of treble
damage suits. The poor results obtained
in settlement in the North Carolina cases confirms this view.
{74} There is
no bright line test: each situation must be considered on its facts and the
factors applied. Different factors
might be important in different cases.
Accordingly, the Court turns to the application of those factors to
these two cases.
VII.
A. The
Crouch Case
{75} The Court’s analysis is premised on the underlying proposition that defendants have engaged in illegal price fixing in the market for rubber chemicals.
{76} Both
Crompton and Bayer have pled guilty to conspiring to fix prices and suppress
competition in the sale of certain rubber compounds and chemicals. On October 13, 2004, the Associated Press
reported that Bayer pled guilty to a criminal charge involving a rubber
compound used in hoses, belts, seals, adhesives and sealants. Crompton pled guilty in Canada to fixing
prices on chemicals used in the manufacture of tire-quality rubber and non-tire
applications such as automobile parts, conveyor belts, weather stripping and
rubber latex gloves from July 1995 to 2001.
Certain of the findings in the Agreed Statements of Facts in the Crompton plea agreement are instructive. It states:
On a commercial basis, rubber chemicals are produced synthetically through highly sophisticated processes. It is apparent that rubber chemicals are now a commodity product and over capacity in the industry has been a constant restraint upon profitable operation and re-investment. Rubber chemicals are significant in the production of useable modern rubber products, principally tires. There are no practical or reasonable economic substitutes to certain rubber chemicals which are the subject of this proceeding, although innovation in both application and production does from time to time cause some products to be superseded. The accused and its co-conspirators are best situated from the perspective of size, experience and incentive to participate in such developments. Based upon facts obtained by the Commissioner, which Crompton is not aware of but does not contest for the purposes of this proceeding, rubber chemicals are said to constitute about 1% of the value of finished tires, they are a practical sine qua non to the manufacture of over $2 billion worth of tires produced in Canada annually. An additional approximately 30% of rubber chemical sales are devoted to non-tire uses in various automobile parts, surgical gloves and other commercial, industrial and health applications.
The
rubber chemical producers identified above manufactured and/or sold the
substantial majority of the rubber chemicals that were sold or distributed in
Canada during the period of the offence for use in the tire, automobile parts,
industrial applications and health industries.
Indeed a significant amount (approaching 50% in some instances) of the
rubber chemicals manufactured in Canada are exported. Each of the above referred to entities participate, to varying
degrees, in the globally organized tire manufacturing industry. The principal Tire Producers buy centrally
(not in Canada) for delivery to their regional production facilities. The rubber chemical producers in turn
organize their delivery logistics to best meet customer demands and their own
production facilities. There is a
significant buyer power within the tire-destined rubber chemical business.
. . .
.
It is
a matter of some debate between Crompton and the Commissioner as to the quantum
of commerce affected by the illegal activity herein referred to. This requires specifically a consideration
of the “lasting effect” of various price increases on certain specific rubber
chemicals. This analysis however, given
the prevailing conditions in the market, does not give credit to the fact that
price increases may not have been appropriate at all and one or more producers
may have had to exit the market, in the absence of such restraints upon the
normal market processes. If Crompton’s
analysis is correct the gap between the opposing views of affected commerce may
be measured in hundreds of millions of dollars. In any event it is agreed that the assessment of competitive injury
is largely one of judgment in all of the relevant circumstances.
The Queen v. Crompton
Corp., [May 2004] F.C.__ (Can.)
(Agreed Statement of Facts).
{77} The Canadian plea agreement highlights two problems significant to the standing determination. First, the calculation of the impact on prices of the conspiracy will be difficult to determine. As noted, “In any event, it is agreed that the assessment of competitive injury is largely one of judgment in all of the relevant circumstances.” That factor is complicated by the significant buyer power within the tire-destined rubber chemical business. Second, the impact on the retail consumer will be minimal. The example in paragraph 79 below highlights the degree of impact on the retail purchaser.
{78} The
problems inherent in the Crouch claims are the same alluded to by Judge
Posner in his noted article on pass through economic analysis.[36] First, the price-fixed item is a product
consumed or altered in the manufacturing process. Accordingly, its use will vary with the type of rubber product
being made. It may also vary with the
nature of the product (chemical) being used and how it is used in the
manufacturing process. Different direct
purchasers (here, tire manufacturers) might use the various chemicals in
various ways in differing products.
{79} The
price today for a set of four BF Goodrich® Touring T/A SR4-P195/70R14 90S
tires, which are similar in size and quality to those purchased by Crouch, is
$222.64 at Sam’s Club’s posted price on the Internet. If the value of the chemicals represents 1% of the value of the
tires,[37]
the chemicals in the tires have a total value of $2.23 or $0.56 per tire. If we assume that in an industry with
overcapacity and strong buyer power the conspirators were able to artificially
inflate prices by as much as 20 %[38]
and assume that all of that can be proven to be passed through to retail
consumers, Crouch’s injury can be calculated to be $0.44 for the set of tires
or $0.11 per tire. Bigger tires will
cost more, smaller tires less. Thus, it
is likely that the recovery per tire sold in North Carolina will be in the
range of $0.01 to $0.11. That number
represents a remote impact on its face.
Certainly it would not represent a meaningful recovery for
consumers. In any event, the costs
associated with litigation and administration of any settlement would far
outweigh the benefits to consumers. Few
consumers are likely to fill out a claim form for $0.44 or even $1.32 (trebled
damages). While the above calculations
would affect class certification, they also are relevant to a determination of
the remoteness of injury.
{80} In
this instance, Crouch would be required to establish tire prices in North
Carolina by manufacturer both before and after the alleged conspiracy
period. Because this case involves a
product used in the manufacturing process, regression analysis would be
required to disaggregate any effect of other changes in the manufacturing
process for each manufacturer for each product category. Further regression analyses would be
required to disaggregate the impact on price, if any (by product category and
by manufacturers), of other influences on the manufacturer’s price. As the product moved down the distribution
chain into various avenues of distribution, each step would require additional
regression studies to disaggregate other impacts on prices until the final
price paid by a consumer for different products purchased in different markets
is determined. To perform such studies
the economists will require enormous amounts of information, parts of which
will constitute trade secrets or confidential information of nonparties,
principally tire manufacturers. Many
manufacturers are foreign companies.
Determining a price differential per tire for tires sold in North
Carolina which were manufactured using price-fixed chemicals during the
relevant time period would be a Herculean task and one which the Court believes
would not be free from speculation given the enormous number of disaggregating
factors to be considered in the process.
{81} Clearly,
the tires made for SUVs will differ from those made for compact cars. The market for these tires will vary. There is a range in quality and price of the
products made using the price-fixed chemicals.
If, as is usually the case, there is cheating among the price fixers,
additional variations are created.[39] In this situation there are a small number
of large producers, some or all of which could exert great pressure on
price. Thus, at the outset the multiple
of variations in pass through analysis is daunting. The discovery involved in ascertaining the production methods,
costs and pricing strategies of tire manufacturers would intrude into their
most fundamental confidential business information and trade secrets, insuring
a long and difficult battle over access.
If that information is available, the demand and supply curves must then
be calculated for this myriad of products and suppliers and the prices
determined by the intersections of those curves tested against rigorous
regression analysis to insure that no external factors affected the pricing and
pass through at the manufacturer level.
{82} Then
the process of determining the subsequent pass through begins. Demand and supply curves and regression
analysis must be created for the various lines of distribution and for the
various companies and for the various products. Here, it is significant that
consumers are at least three steps removed from the original offense. That makes apportionment of damages/pass
through extremely difficult and raises a greater risk of double recovery.
{83} Again,
the distribution processes may vary with producers and products. Are there tires on the market which were
made with non-price-fixed chemicals? If
so, how do they affect price? What is
the effect of foreign competition? Do
company owned stores or franchises sell at different prices than Sam’s Club or
Wal-Mart? Does the corner gas station
price yet another way? Must the pass
through expense be determined with reference to the customer base? These are but a sampling of the difficulties
inherent in determining pass through in this case.[40]
{84} Each
case must be analyzed individually.
There will be cases where the economic analysis is not difficult. Hyde may have been one of those
cases. There could be other examples
where a component, such as a computer chip, is price fixed, and its costs
passed through directly to purchasers of the product in which it is
incorporated.[41] Individual cases will vary, and the factors
must be considered in each case. The
relevant reliability of economic analysis is a key factor in applying those
factors. The economic analysis cannot
be oversimplified. See In re
Aluminum Phosphide Antitrust Litig., 893 F. Supp. 1497, 1503 (D. Kan. 1995). There, the court rejected an expert report
which failed to apply standard economic methodology to test the conclusions
reached. In ruling on a motion in
limine the court said:
The goal of a prudent
economist in performing the “before and after” analysis is to determine the
hypothetical or “counter-factual” prices that would have prevailed during the
conspiracy period, but for the conspiracy.
In applying the “before and after” model of damages, it is fundamentally
necessary to explain the pattern of forces outside the violation period using
factors that might have changed (i.e., supply, demand, and the differences in
competition) to predict the prices during the conspiratorial period. In this context, as in most economic problems,
failure to keep “other things equal” is one of the known “pitfalls … in the
path of the serious economist.”
Samuelson, P. and Nordhaus, W.D., Economics (13th ed.) at p.
7. This case presents two potential
normative periods, a “before” period and an “after” period that have distinctly
different price levels. One therefore
must identify the reasons for the disparate price levels. According to Dr. Siegfried, the field of
economics supplies a statistical methodology for making this determination on a
scientific basis, and the generally accepted means of predicting the prices
that would have prevailed absent the conspiracy is regression analysis. At a minimum, regression analysis addresses
supply and demand factors by looking at price trends over time. A prudent economist must account for these
differences and would perform a minimum regression analysis if utilizing the
“before and after” model.
Id. at 1503-04 (footnotes omitted).
{85} The
five key factors are analyzed with respect to Crouch below.
1. The relevant market. The chemical manufacturers accused of price
fixing sold to rubber manufacturers.
Because the number of sellers and the number of buyers was relatively
small, the price fixing scheme had to have at its core an effort to affect price
pressure from the oligopolists in the tire manufacturing business. The antitrust laws are designed to see that
customers in the relevant market get the benefit of price competition. This is a mixed case, as there are two
relevant markets: the first is the market for chemicals, and the second is the
market for rubber products indirectly affected by the artificial influence in
the chemical market. As a purchaser at
retail of a rubber product, Crouch is in a market secondarily affected by the
restraint in the original chemical market.
That is a complicating factor for standing. This factor weighs slightly against standing, as the alleged
price fixing was directed at the market for chemicals, not the market for
tires. Prices were allegedly fixed for
chemicals used to manufacture other rubber products. However, the plaintiff purchased a product the price of which may
have been influenced by the illegal restraint.
2. Directness of impact on plaintiff. The fact that the artificially restrained
price impacts the manufacturing process removes it at least one level of
directness. Unlike a component that
remains unchanged when incorporated in the final product, manufacturing costs
are less directly passed through and may be affected by differing manufacturing
processes used by producers. While it
is clear that in most instances some portion of a price-fixed cost gets passed
along, the directness can be impacted by the nature of the item subject to
price fixing, be it a component, labor cost, or something used in the
manufacturing process.
The nature
of the item can influence the directness of the impact on the price of the end
product at retail. Because these
chemicals are products used in a manufacturing process, the direct impact at
retail is less clear and subject to variation among manufacturers using the
chemicals. The smaller the component,
the less likely there will be impact on the final price. Here the chemicals only comprise 1% of the
value of a tire, reducing the likelihood that total final price was
significantly affected.
There is
also an additional question of the length of the distribution chain. While plaintiff purchased from Sam’s Club,
which may have purchased directly from a manufacturer, other class members may
have purchased through other lengthier distribution chains.
This
factor weighs against standing.
3.
Other indirect
purchasers. This is the factor which gets most confusing when Illinois
Brick is eliminated. State courts
should focus this inquiry on whether or not the existence of other indirect
purchasers in the chain of distribution gives rise to other claims against the
fund representing the amount by which the price of the retail item has been
artificially inflated. It becomes more
of an examination of whether there will be double recovery on the state claim
(eliminating the concern about double recovery created by standing holdings in Hanover
Shoe/Illinois Brick). Here the
other indirect purchaser claimants may be distributors and retailers who claim
to have absorbed some of the price increase.
No claims have been filed on their behalf. This factor would adversely impact standing in Crouch based
on this record.
4. & 5. Speculative
nature of damage claims and complexity.
These items sometimes overlap.
That is the case with Crouch.
In this case there are multiple factors which render valid economic
analysis either impossible or unmanageably complex. While the number of manufacturers is not great, each will have
different manufacturing processes.
Those processes and the use of alleged price-fixed chemicals will vary
from product to product. Products will
vary in size, quality and costs. There
will be different markets for the products — retailers like Wal-Mart, Sam’s
Club, K-Mart and Sears, local tire stores, gas stations, company franchise
stores and Internet sales. In a typical
price fixing scenario, some, if not a substantial portion, of the price
increase is absorbed at the earliest stages in the distribution chains. Some retailers will buy direct; some will
buy from distributors. Foreign
competition, not insignificant in the tire industry, can affect price. Tracing the price of the processing
chemicals through foreign manufacturers provides other problems. The price of tires may be affected by
external factors such as high gas prices, which could lower demand. Each variation in manufacturer’s process,
price, size, quality, market, distribution method and changes in applicable
externalities requires individual supply and demand analysis and may require
multiple regression analyses in order to eliminate the speculative nature of
any damage calculation. Given the many
variables, the issues surrounding allocation of the alleged price fixing fund
in this case would be exceptionally complex and the results of economic
analysis speculative.
Unlike direct purchasers who may recover for costs which they do not
incur, state indirect purchasers may recover only for injury actually
incurred. Thus, they must prove pass
through of the artificially inflated cost.
To prevent double recovery for the same alleged injury there must be a
reliable means of allocating the effects of the price fixing among the various
participants in the distribution chain.
It must take into account other externalities. For example, how would purchasers of tires that were recalled and
replaced be treated? Factor 5 takes
this complexity into account when drawing the line on remoteness of
claims. The size of the impact on tire
prices is relevant here. As
demonstrated in paragraph 78 above, any increase in tire prices will be
relatively insignificant. In Crouch,
factors 4 and 5 dictate heavily against standing.
There may well be occasions on which the Court should defer a standing
determination until there has been far ranging discovery and expert evidence
produced on pass through and allocation.
The problem inherent in delay is the enormous cost involved in getting
the information and expert analysis. If
it proves insufficient, substantial resources will be wasted. Where, as here, it is apparent from the
pleadings that any analysis will either be speculative or allocations
enormously complex, the Court should rule on standing early in the
process. Where, as here, counsel have not
made any attempt to ascertain facts relating to standing prior to filing suit,
the court’s job is made more difficult.
The rush to file in indirect purchaser states works against adequate
investigation prior to filing.
{86} Considering all five factors, Crouch lacks standing to pursue
indirect purchaser claims.
B. The Morris Case
{87} The Morris
case presents a far easier analysis. It
is not a price fixing case.
{88} In
Morris, the underlying antitrust claim is for illegal tying of credit
and debit cards under the “Honor All Cards” policy. For purposes of analysis here, the Court assumes the tying
arrangement was illegal. Tying cases
present unique damages issues.
In
tying cases, the measure of damages to an injured purchaser is described as
“the difference between the price actually paid for the tied product and the
price at which the product could have been obtained on the open market.” However, several courts have held that
damages can be recovered only if the combined fair market value of both the
tying and tied products is exceeded by the amount actually paid for both.
Private
Antitrust Suits, A.B.A. Sec. Antitrust Law, Antitrust Law
Developments 875 (5th ed. 2002) (footnotes omitted).
{89} Here, not only would Plaintiff be required
to show the underlying complicated damage to merchants,[42]
but also how those damages got passed on in each and every consumer transaction
by the merchant. In the case of a hot
product which sells on its label (Calvin Klein jeans, for example) so that the
price is unrelated to costs of sale, manufacture or distribution of the
product, how could plaintiff possibly show what part of the price included a
pass through cost resulting from the tying arrangement which would not have
been included in the absence of the tying arrangement?[43] How could the Court administer a trial where
every consumer transaction might be subject to that proof for every
merchant? It cannot be done. More compelling is the fact that a
determination would have to be made for every product since price elasticity
varies between products.[44]
{90} The five key factors with respect to Morris
are analyzed below.
1.
The relevant market. Defendants
refer to plaintiff as a “non-purchaser.”
That is shorthand for not being a purchaser in a relevant market. The relevant market in Morris is the
sale of credit and debit card services.
Morris did not make a purchase in that market. Morris simply made purchases of consumer goods. Antitrust laws are designed to see that
customers in the relevant market get the benefit of price competition. In this case the customers in the relevant
market would be the retailers who purchase debit and credit card services, not
all consumers of retail products. This
factor alone would strongly support a finding of no standing in Morris.
2.
Directness of impact. The
underlying restraint alleged in Morris was a tying arrangement, not
price fixing. It is founded on the
proposition that retailers paid more for debit card services than necessary
without the tying arrangement. Morris
does not even allege he is a debit card holder. He seeks to represent a class consisting of consumers who paid by
a credit card, paid cash, paid by check, bought on credit or used a debit
card. The impact of the alleged tying
arrangement (which applied only to retailers using debit card services) on
consumers is as remote as this Court can conceive.
3.
Other indirect
purchasers. Since consumers are not a part of the relevant market for
credit/debit card services, there are no other indirect purchasers. This is a situation where the impact, if
any, of the tying arrangement falls directly on the direct purchaser.
4.
Speculative nature of
damage claims. This is not a price fixing case. It is at bottom a tying case which carries
additional proof problems affecting the speculative nature of damages to
indirect purchasers. Indirect
purchasers would first have to prove what the damages were to retailers. Retailers would be required to show that the
tied price of debit and credit cards was higher than the price of each sold
separately in competitive markets.
Indirect purchasers would then be required to show how those damages got
passed through or had a direct impact on each consumer purchase they made in
North Carolina, whether by cash, check, credit card or debit card. Two examples come to mind. When a teenager pays $100 cash for a pair of
designer label jeans that cost $10 to make because they are the hot fashion
item, are they paying more than they would have paid had there been no tying
arrangement involving debit or credit cards?
How could that be proven? What
about the item that is put on sale below cost because it is outdated and needs
to be cleared from inventory?
Assuming that injury at the retailer level could be
quantified somehow, that injury would be attributable only to the increased use
of debit cards, a minor part of the market.
According to plaintiff, that cost is then spread over every consumer
product sold by every retailer. If
plaintiff is correct, the recovery per product will be infinitesimal. In addition, the manageability of the
litigation and the administration of any settlement present insurmountable
barriers. If the Court of Appeals asked
today if there is an example of “an impossible complex situation,” the Morris
case would provide such an example. The
Court cannot conceive of an economically feasible way to administer a trial
which would require inquiry into how every retailer set the price for every
consumer good sold in this state. Nor
is it conceivable that any judgment would be in any amount which could be
economically allocated and paid to every consumer in North
Carolina.
5. Complexity. It is difficult to imagine a more complex
damage case. Plaintiff’s case would
require an analysis of pricing of virtually every product sold at retail in
North Carolina. The litigation could
last an interminable period, and it is difficult to conceive of how a claims
process would work. It is likely the
price increases attributable to the excess cost to the retailer of using debit
cards would be such a small measure that there would be no cost effective way
to administer a claims process that would compensate consumers directly.
{91} Each AGC factor in Morris
supports dismissal of the claims.
Morris asserts remote claims outside the relevant market which involve
speculative and complex damages. Eight other jurisdictions have agreed and thus
placed limits on indirect purchaser standing. Plaintiff’s counsel urged the
Court to permit amendment to the pleadings to assert only claims for debit card
holders. Such an amendment would make
no difference in the outcome on this motion.
{92} Having found that the complaint is subject to dismissal, the Court does not need to address defendants’ argument that plaintiff seeks relief that would violate the Commerce Clause of the United States Constitution.
{93} If state antitrust laws are to have any impact, they must work. Compromise cy pres settlements that provide no payments to consumers have little deterrent effect and no benefit for those actually injured. Where actual injury can be shown with reasonable certainty, defendants should pay those damages to the injured parties and be subject to statutory penalties. That is a real deterrent, and it benefits those injured.
{94} Part of
the problem in dealing with indirect purchaser cases is the race to the
courthouse which follows a triggering event at the federal level. Despite the fact that the case was two years
old, when asked at oral argument, plaintiff’s counsel in Crouch had no
idea what the pass through per tire would be, either in cents or in
dollars. His suggestion was for the
Court to wait until class certification and address the issues in that context. Where, as here, it is apparent from the
pleadings that either (1) sound economic analysis can only produce speculative
damages or (2) the complexity of the required sound economic analysis is
staggering and virtually impossible to accomplish given the inability to get at
all the required information, deferral to class certification is
unnecessary. The Court is not required
to nor should it defer standing determinations to class certification. While there may be some overlap in the
factors considered in each determination, the tests are different.
{95} As
Justice Brennan noted in his dissent in Illinois Brick, the complexity
of damage proof should not foreclose a claim.[45] That policy must be balanced with the need
to control the manageability of litigation.
Judge Posner has correctly noted that indirect consumer class actions
frequently do little to provide redress for injury in indirect purchaser cases,[46]
and the North Carolina cases support his conclusion.[47] The proper focus should be on insuring that
those cases in which there is non-speculative proof of direct impact on
consumers at something other than a negligible level get tried and those cases
which fall outside the limits of rational accepted economic analysis are
dismissed. The modified AGC
factors provide guidelines for making those determinations at the trial
level. Applying those factors to these
two cases results in their dismissal.
Other cases may come out differently or may require some discovery
before ruling. Class actions which
provide no redress to those actually injured do not fulfill the purpose of the
state statute which is to redress injury to those directly impacted by the price
fixing.
{96} State
statutes do not provide as effective a deterrent as the federal scheme. There is an adequate and more effective
deterrent to antitrust violations at the federal level. State indirect purchaser cases should be
designed to provide relief to those directly injured by antitrust
violations. Since they permit double
recovery they should be narrowly construed.
Similar to the judgments the legal system makes on “foreseeability” in
negligence cases, judgments on “standing” are designed to place limits on what
would otherwise be limitless claims.
The two concepts are similar in that they set a boundary beyond which
claims are determined to be too remote.
Where a class action will provide no actual benefit or an insignificant
benefit to class members, there exists a strong inference that the class claims
are too remote or speculative to withstand scrutiny under the modified AGC
factors. Sometimes, as here, the
standing determination can be made early in the process and save significant
resources. Other times the
determination should await further discovery before decision. In either case, the five factors set out
above should be applied and each case determined on its own facts. Applying the factors to the claims in Crouch
and Morris results in dismissal.
It is hereby ORDERED, ADJUDGED and DECREED:
1.
Defendants’ Motion to
Dismiss in Crouch is granted, and plaintiff’s claims are hereby
dismissed.
2.
Defendants’ Motion to
Dismiss in Morris is granted, and plaintiff’s claims are hereby
dismissed.
3.
Each party shall bear
its own costs.
This the 26th day of October 2004.
[1] Am. Compl. ¶ 20. At oral argument the Court understood plaintiff’s counsel to say that the class would be limited to retail consumers, excluding, for example, customers who purchased used cars with new tires.
[2] Miles Moore, U.S., EU Probing Rubber Chemical Suppliers, Rubber & Plastics News, Oct. 14, 2002, at 1.
[3] William Landes and Richard 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). The authors stated:
Our analysis has suggested that the rule of Illinois Brick, which bars indirect purchasers from bringing private antitrust damage actions, is probably the soundest rule from the standpoint of maximizing the effectiveness of antitrust enforcement. We anticipate the argument that, however abstractly desirable it may seem to confine enforcement to direct purchasers, to do so is to alter the fundamental character of the private antitrust action in a way that cannot be squared with the intent of Congress in creating private damage remedies for antitrust violations. One way of characterizing our position is that it allows someone who may not be injured (or not injured much)—the direct purchaser—to recover (treble) damages while denying the right to recover any damages to other people—indirect purchasers—who may in fact be injured. There is an element of paradox in this result, but it is dispelled by careful analysis. As we have shown, even if indirect purchasers were given the nominal right to sue, they would often fail to receive significant compensation. And anyone troubled by the windfall element in the judgment received by the direct purchaser must in logic reexamine the entire structure of private antitrust enforcement. Two-thirds of every private antitrust damage judgment (the punitive component of the judgment) is a windfall to the purchaser. In a class action, much of even the compensatory portion of the judgment may end up in the pockets of lawyers or in state treasuries, rather than in the pockets of the people who were actually harmed by the antitrust violation. The windfall element cannot be purged by the private antitrust suit without a complete reworking of antitrust enforcement. Until that is done, society will be well-advised to allow some direct purchasers to enjoy windfalls if, as we have argued, the direct purchaser suit is on balance a more effective instrument for enforcing the antitrust rule prohibiting price fixing than the indirect-purchaser suit.
Id. (footnote omitted).
[4] See D.C. Code Ann. § 28-4509(a) (1981).
[5] Justice Brennan suggested a target area test as one possible approach to standing, but did not actually endorse it as a test to be adopted. It is worthy of note that Justice Brennan was among the majority in its holding in Associated General Contractors of California, Inc. v. California State Counsel of Carpenters, 459 U. S. 519 (1983) (“AGC”), which was decided subsequent to Illinois Brick and prior to the 1996 amendments to the North Carolina statute.
[6] See Landes and Posner, supra note 3, at 609, 615, 619-20.
[7] See Landes and Posner, supra note 3, at 611-12, 617-18, 620, 625.
[8] The application of the AGC standing requirements was not originally argued in Crouch, but was argued in Morris. Subsequent to the oral argument in Morris, counsel in Crouch were afforded the opportunity to address the application of the AGC requirements as well as the application of a target area test to the fact situation in Crouch. Each side filed supplemental briefs on those questions.
[9] 15 U.S.C. § 15 (2004). That provision is the model after which the North Carolina statute is patterned. See infra ¶ 46.
[10] See Pl.’s Opp’n Defs.’ Mot. Dismiss at 8-9 in Morris; Pl.’s Mem. Opp’n Defs.’ Mot. Dismiss at 4-9 in Crouch.
[11] See infra ¶ 49; N.C.G.S. § 75-1 (1999); Act of June 3, 1996, ch. 550, 1995 N.C. Sess. Laws 550 (titled “An Act to Revise the Statutes Regarding Antitrust Law to Ensure That These Provisions are Internally Consistent and Consistent with Federal Antitrust Laws”).
[12] The Hyde court held: “Unlike Texas, our General Assembly has not mandated that our antitrust laws be construed in harmony with federal antitrust laws.” 123 N.C. App. at 581, 473 S.E.2d at 686.
[13] See discussion infra Part V.B (describing the indirect purchaser litigation since Hyde was decided).
[14] The Hyde court specifically found that there were no complex damage or proof issues before it and further held that there was nothing in the record in that case to establish that other cases would pose difficult damage and administrative issues. The Hyde court said:
It is clear that a suit by indirect purchasers under our antitrust laws will be complex. However, when asked at oral argument whether “chaos reigned” in states which have allowed indirect purchaser suits, defendants were unable to cite a single example. This failure to cite a single indirect purchaser case in which a court has been faced with an impossible complex situation counsels us that a fear of complexity is not a sufficient reason to disallow a suit by an indirect purchaser….
123 N.C. App. at 584, 473 S.E.2d at 687-88.
The facts in Hyde presented a fairly simple case. The product was a commodity which was not altered or incorporated in another product in the distribution chain, and the price fixing took place at the wholesale level, only one level removed from the consumer. Direct impact on the consumer and pass through were not difficult issues to prove. The question of whether the fixed price was absorbed by the consumer was not difficult. The complexity presented by Morris and Crouch differs dramatically from Hyde.
[15] The Hyde court found: “However, there are few, if any, reported instances of a defendant paying treble damages to two different classes of purchasers based on a single antitrust violation.” 123 N.C. App. at 583, 473 S.E.2d at 687. In Crouch, plaintiffs seek to recover the same damages for which direct purchasers such as tire companies may seek treble damages. In Morris, defendants have already agreed to a multibillion dollar settlement with the direct purchaser class. In Bruggers, the class recovered for the same offenses which were the subject of federal direct purchaser actions. Likewise, in Microsoft, the plaintiffs recovered on the same claims which were asserted by direct purchasers. The problems recognized with possible double recovery are obvious.
[16] The settlements in Long v. Abbott Laboratories, 1999 NCBC 10 (No. 97CVS8289, Mecklenburg County Super. Ct. July 30, 1999) (Tennille, J.), Bruggers and Microsoft demonstrate the difficulties inherent in consumer class action cases. Long was a cy pres settlement that provided no benefit to the class. Bruggers resulted in a settlement that went to class members under a cumbersome administrative process which did not likely reach anything more than a small minority of the class. Microsoft is a classic example of the complex administrative problems that can be created. It will likely result in primarily a cy pres settlement. All of these cases fit the forecast of difficulties made by Landes and Posner in their article. See supra note 3.
[17] Cornelison v. Visa U.S.A., Inc., Civ. No. 03-1350 (Pennington County Cir. Ct., S.D. Sept. 29, 2004).
[18] Beckler v. Visa U.S.A., Inc., Civ. No. 09-04-C-00030, at 5 (Cass County Dist. Ct., N.D. Aug. 23, 2004).
[19] Stark v. Visa U.S.A., Inc., No. 03-055030-CZ (Oakland County Cir. Ct., Mich. July 23, 2004).
[20] Gutzwiller v. Visa U.S.A., Inc., No. 14-C4-04-000058 (Clay County Dist. Ct., Minn. Sept. 15, 2004).
[21] Ho v. Visa U.S.A., Inc., No. 112316/00, 2004 N.Y. Misc. LEXIS 577 (New York County Super. Ct., N.Y. Apr. 21, 2004).
[22] Credit/Debit Card Tying Cases, No. CJC-03-004335 (City and County of San Francisco Super. Ct., Cal. Oct. 14, 2004).
[23] Tackitt v. Visa U.S.A., Inc., No. C103-740 (Lincoln County Dist. Ct., Neb. Oct. 19, 2004).
[24] Knowles v. Visa U.S.A. Inc., No. CV-03-707 (Cumberland County Super. Ct., Me. Oct. 20, 2004).
[25] The Adams case is an exception. In that case the plaintiffs were individual hog farmers who opted out of a class action settlement that they believed was disadvantageous.
[26] The reasons for settlement are aptly described in the ABA Report of Indirect Purchaser Cases at supra ¶ 33.
[27] See the settlements in Adams, and Thai Holding v. Archer Daniels Midland Co. (No. 03CVS15096, Mecklenburg County Super. Ct., N.C. Aug. 24, 2004) (Tennille, J.) (Order Staying Action).
[28] The court reduced the request to approximately ten percent based on the poor results for the class.
[29] Twenty three of the largest drug companies in the world.
[30] The original complaint sought a nationwide class consisting of residents of all states which had indirect purchaser standing. The complaint was amended to limit the claims to North Carolina.
[31] MJM Investigations, Inc. v. Microsoft Corp. (No. 00CVS4073, Wake County Super. Ct.; No. 00CVS1246, Lincoln County Super. Ct., N.C. Aug. 2, 2004) (Tennille, J.) (Order Approving Settlement).
[32] See the description at supra ¶ 50.
[33] Adams, 2003 NCBC 7, at ¶ 31.
[34] Thai Holding v. Archer Daniels Midland Co. (No. 03CVS15096, Mecklenburg County Super. Ct., N.C. Aug. 24, 2004) (Tennille, J.) (Order Staying Action).
[35] See Landes and Posner, supra note 3, at 617.
[36] See Landes and Posner, supra note 3, at 615-21.
[37] One percent was the actual number used by Canadian authorities in their case against Crompton. See supra ¶ 76.
[38] The calculation of this number will be difficult, but it is difficult to conceive of prices being artificially inflated at a higher level in a market with strong buyer power and overcapacity. It is also unlikely that 100% of the inflated cost was passed through to consumers or that it affected consumer prices.
[39] Price fixing schemes frequently fall apart because the temptation to cheat to get market share is great.
[40] See, Michele Molyneaux, Comment, Quality Control of Economic Expert Testimony: The Fundamental Methods of Proving Antitrust Damages, 35 Ariz. St. L.J. 1049, 1074-75 (2003).
[41] The Court notes that certain manufacturers of DRAM chips used in a variety of computer products have been accused of price fixing. See, Stephen Labaton, Infineon To Pay a Fine In the Fixing Of Chip Prices, N.Y. Times, Sept. 16, 2004, at C6. The Court expresses no opinion on standing in that situation. Each case must be judged on its own merits, and that case is not before the Court. The Court simply notes that the nature of the component can make a difference.
[42] For cases discussing the difficulty of proof in tying cases see, Will v. Comprehensive Acctg. Corp., 776 F.2d 665 (7th Cir. 1985); Kypta v. McDonald’s, 671 F.2d 1282 (11th Cir. 1982); Siegel v. Chicken Delight, 448 F.2d 43 (9th Cir. 1971).
[43] Gutzwiller v. Visa U.S.A., Inc., No. 14-C4-04-000058 (Clay County Dist. Ct., Minn. Sept. 15, 2004). Judge Vaa presented an illustrative example:
Assume that Plaintiff purchased an item at a K-Mart store which accepted Visa and MasterCards, on March 1, 2003. To recover damages, Plaintiff would first need to prove that as a result of Defendants’ alleged restraint of trade in providing debit card services to that K-Mart store, K-Mart paid excessive debit fees. Plaintiff would then need to prove that K-Mart did not absorb any such excess debit fees by making less profit, or in some other non-monetary way, such as by hiring fewer employees and/or not making major repairs to its building, but instead passed on the excess debit fees in the price of the items sold to consumers. Plaintiff would then need to prove that some identifiable portion of the item was not attributable to any factors which might affect the price of that item on that specific date. Plaintiff would then need to make the same offer of proof for any item sold by the K-Mart store not only on March 1, 2003, but for every other day in issue, and would have to make the same offer of proof relative to every other merchant involved in his claim.
Id. at 16.
[44] This fact alone would render class certification impossible since each customer would have different damages depending on each individual purchase they made.
[45] 431 U.S. at 758-60.
[46] See Landes and Posner, supra note 3, at 607.
[47] See discussion supra ¶¶ 60-65.