KAREN
BRUGGERS, D.D.S.,
)
)
Plaintiff,
)
)
v.
)
)
)
ORDER AND OPINION
EASTMAN KODAK COMPANY,
)
E.I.
DUPONT DE NEMOURS & CO.,
)
BAYER CORPORATION and FUJI
)
MEDICAL
SYSTEMS U.S.A., INC.,
)
)
Defendants.
)
{1} This matter is before the Court on defendant Eastman Kodak Company’s motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure.[fn1] For reasons set forth below, it appears to the Court that the complaint states a cause of action for which relief can be granted. In so holding, the Court determines as a matter of law that indirect purchasers have standing to sue under N.C.G.S. § 75-16. Therefore, the defendant’s motion to dismiss is DENIED.
The
Blount Law Firm, P.L.L.C., by Marvin K. Blount, Jr.; Leibenberg & White,
by Roberta D. Liebenberg and Robert G. Eisler; Frank & Rosen, by Alan L.
Frank and David T. Shulick; Leiff, Cabraser, Heimann & Bernstein, by
Joseph R. Saveri; Levin, Fishbein, Sedran & Berman, by Howard Sedran; and
Hoffman & Edelson, by Marc Edelson, for Plaintiff Karen Bruggers, D.D.S.
Nigle
B. Barrow, Jr.; and Pitney, Harden, Kipp & Szuch, by Clyde A. Szuch and
Murray J. Laulicht, for Defendant Bayer Corporation.
Smith,
Helms, Mulliss & Moore, L.L.P., by James L. Gale and Matthew W. Sawchak;
and Jones, Day, Reavis & Pogue, by Thomas Demitrack and Deborah P. Herman,
for Defendant FUJI Medical Systems, U.S.A., Inc.
Womble
Carlyle Sandridge & Rice, by Pressly M. Millen; and Hallenbeck, Lascell,
Norris & Heller, by David M. Lascell, for Defendant Eastman Kodak Company.
Parker,
Poe, Adams & Bernstein L.L.P., by John F. Graybeal; and Crowell &
Moring L.L.P., by George D. Ruttinger and David M. Schnorrenberg, for
Defendant E.I. DuPont de Nemours & Co.
I.
{2}
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 Laboratories, Inc., 123 N.C. App. 572, 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 legal certainty that plaintiff is entitled to no relief under any state
of facts which could be proved in support of the claim.
See id.
Kodak’s motion raises the narrow, but significant, legal issue of
whether indirect purchasers have standing to sue under North Carolina’s
antitrust laws.
II.
{3} Plaintiff brings this class action against the manufacturers of medical x-ray film, claiming they agreed or conspired to raise and then fix prices. Although the class has not yet been certified, plaintiff’s amended complaint defines the class as “[a]ll persons and entities (excluding defendants, their co-conspirators, their parents, subsidiaries and affiliates, and all government entities) that indirectly purchased medical x-ray film within the state of North Carolina produced by any defendant or co-conspirator between 1989 and 1994.” (Amend. Compl. ¶19.) The class of indirect purchasers in this action could conceivably include dentists and other health care providers, hospitals, insurance companies, and patients. Plaintiff, a dentist, is an indirect purchaser of medical x-ray film. Plaintiff alleges that during the relevant time period, defendants were the major producers and sellers of medical x-ray film throughout the United States. Defendants sold medical x-ray film to distributors, who, in turn, sold the film to members of the proposed class.
{4}
Plaintiff’s complaint sets forth claims of fraudulent concealment and
restraint of trade or commerce in violation of North Carolina’s antitrust
law, N.C.G.S. § 75-16. Defendant
brings this motion to dismiss on the grounds that plaintiff was an indirect
purchaser and therefore has no standing to bring an action against defendant
for antitrust violations. Plaintiff
admits she was an indirect purchaser and relies on the holding in Hyde
v. Abbott Laboratories, Inc., 123 N.C. App. 572, 473 S.E.2d 680 (1996), to
support her standing to sue under state antitrust laws.
Eastman Kodak contends that the issue of indirect purchaser standing
has not been definitively resolved by the North Carolina Supreme Court and
that the state of North Carolina would not recognize indirect purchaser
standing under its antitrust laws. (Def.’s
Mem. Supp. Dismiss at 8-11, 18-19.)
The majority of states follow the federal rule and do not permit
indirect purchaser standing, either by statute or case precedent.
See Stifflear v. Bristol-Myers
Squibb Co., 931 P.2d 471 (Colo. Ct. App. 1996); Abbott
Labs. v. Segura, 907 S.W.2d 503 (Tex. 1995); Blewett
v. Abbott Labs., 938 P.2d 842 (Wash. Ct. App. 1995).
{5}
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.
{6} 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).
{7}
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.
{8}
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. Section
4 of the Clayton Act provides that:
any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor in any district court of the United States in the district in which the defendant resides or is found or has an agent, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney’s fee.
{9}
Section 4 of the Clayton Act and N.C.G.S. § 75-16 both confer standing
upon persons who are injured as a result of a violation of the statute.
Thus, the central question in antitrust actions is whether the
plaintiff suffered any legally cognizable injury.
In 1968, the Supreme Court of the United States rejected a defense to
an antitrust claim based on the theory that plaintiff suffered no injury
because the illegal overcharge was passed on to plaintiff’s customers.
See Hanover Shoe, Inc. v. United
Shoe Machinery Corp., 392 U.S. 481 (1968).
This holding allowed direct purchasers to enforce federal antitrust
laws regardless of whether they absorbed or passed on the overcharge.
Almost ten years later, the Supreme Court relied on the rationale of Hanover
Shoe to support its holding that an indirect purchaser may not use a
pass-on theory offensively in an action against an alleged violator of federal
antitrust law. See
Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
Therefore, under federal law, because indirect purchasers cannot
establish a legally cognizable injury, only direct purchasers may pursue an
overcharge claim arising from an antitrust violation.
{10}
In this case, defendant argues that the Court of Appeals in Hyde
was incorrect in interpreting N.C.G.S. § 75-16 to confer standing upon
indirect purchasers. Defendants
asserts that the interpretation of federal antitrust statutes by the federal
courts should guide the interpretation of the North Carolina antitrust
statute. Defendant points to
cases in which the North Carolina Supreme Court has looked to federal
precedent in construing the scope of N.C.G.S. § 75-1.
See Madison Cablevision, Inc. v.
City of Morganton, 325 N.C. 634, 386 S.E.2d 200 (1989); Skinner
v. E.F. Hutton & Co., 314 N.C. 267, 333 S.E.2d 236 (1985);
Rose v. Vulcan Materials Co., 282 N.C. 643, 194 S.E.2d 521 (1973).
{11}
While the Court of Appeals in Hyde
recognized that federal antitrust precedent is persuasive authority, it noted
that it was not required to construe North Carolina law in harmony with
the federal law. 123 N.C. App. at
582, 473 S.E.2d at 686. The court
emphasized that the Illinois Brick decision
came eight years after the North Carolina legislature amended N.C.G.S. §
75-16. Thus, according to the
Court of Appeals, the legislature could not have intended to adopt a
construction of the statute consistent with Illinois
Brick. Instead, the Court of
Appeals “considered as persuasive authority federal cases interpreting the
federal antitrust laws as they existed in 1969.”
Id. at 578, 473 S.E.2d at
684. In doing so, it reviewed
federal case law decided between 1968 (the year Hanover
Shoe was decided) and 1977 (the year Illinois
Brick was decided). This
review led the Court of Appeals to the conclusion that “[p]rior to the
United States Supreme Court’s decision in Illinois
Brick, most federal circuit courts construed Section 4 of the Clayton Act
to allow suits by indirect purchasers.”
Id. at 579, 473 S.E.2d at
685.
{12}
Defendant argues that the Hyde
court’s analysis of federal precedent was flawed.
First, defendant points to cases in which the North Carolina Supreme
Court did not hesitate to interpret state antitrust law in light of
subsequently decided federal precedent. See
Madison Cablevision, Inc., 325 N.C. 634, 386 S.E.2d 200; Skinner,
314 N.C. 267, 333 S.E.2d 236; Rose,
282 N.C. 643, 194 S.E.2d 521. Furthermore,
because Illinois Brick was based
upon the holding in Hanover Shoe,
which was decided prior to the amendment of the North Carolina statute,
defendant argues that the Court of Appeals should have placed more weight on
the Illinois Brick decision.
{13}
In addition, the defendant argues that the Hyde
court did not give due attention to the problems with indirect purchaser
standing. The Illinois
Brick Court found that allowing offensive but not defensive use of a
pass-on theory would create three primary concerns for the courts:
(1) risk of multiple liability; (2) difficulty in apportioning the
responsibility for the overcharge among those in the chain of distribution;
and (3) lack of incentive for the direct purchaser to sue.
The North Carolina Court of Appeals found that the concerns identified
in Illinois Brick were “less
worrisome” under the facts in Hyde.
123 N.C. App. at 582, 473 S.E.2d at 687.
The Hyde court dismissed the
problem of multiple liability, stating that “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.[fn2]
Second, the Hyde court found
that granting indirect purchaser standing under state law would not create a
disincentive for direct purchasers to sue under federal law.
Id.
In fact, a defendant could face liability under both federal and state
law. Therefore, allowing indirect
purchaser standing creates an incentive to sue for violation of North Carolina
antitrust law. Id.
Finally, while the Court of Appeals acknowledged the complexities
created by indirect purchaser standing, it refused to deny indirect purchaser
standing based on a hypothetical problem it found did not exist in that case.
Id.
{14}
In contrast, Kodak asserts that the problems with indirect purchaser
standing identified in Illinois Brick are
present in this case. The Court
agrees with that assessment. First,
this case clearly presents the difficult issue of apportioning the
overcharges. Putative class
members suffered injury only to the extent that there was an overcharge to
distributors, that any such overcharge was passed on to indirect purchasers,
and that the indirect purchasers absorbed the overcharge rather than passing
it on to someone else in the distribution chain or to the ultimate consumer.
The distributors may or may not have passed the overcharge along.
They may have passed the overcharge to some customers and not to
others, depending on the customer’s buying power.
Unlike the plaintiff in Hyde,
the plaintiff here was not the ultimate consumer.
Plaintiff and other putative class members may have passed on some or
all of the alleged overcharge to their patients or to third party payers.
Additional complexity is created by the fact that the plaintiff in this
case used the product in connection with the provision of services which vary
in cost, thus making it even more difficult to determine who bore the injury
of any alleged overcharge. Accordingly,
a substantial number of subclasses may be required in this case as well as in
other indirect purchaser cases.[fn3]
{15}
The risks of complicated proof and apportionment in this case are not
merely hypothetical as they were in Hyde.
In the related federal litigation, In
re Medical X-Ray Film Antitrust Litigation, the direct purchasers claimed
that they were injured by the alleged overcharges.
The direct purchasers recovered through settlement.
See In re Medical X-Ray Film
Antitrust Litigation, No. 93 Civ. 5904 (E.D.N.Y. Aug. 7, 1998).
Now, in this case, the indirect purchasers are claiming that the
overcharge was passed on to them, thus presenting the Court with the problem
of allocating damages, when in another action the direct purchaser recovered
against the manufacturers by claiming that they absorbed the overcharge.
This situation directly raises the issue of multiple liability, which
did not arise in Hyde.
Defendant, having settled the federal action brought by direct
purchasers, now faces liability for the same alleged wrongdoing.
This risk of multiple liability is precisely why federal courts and a
majority of state courts have declined to grant indirect purchaser standing.
In addition, defendant argues that allowing indirect purchaser standing
in this case adds little if anything to the deterrence value of the North
Carolina antitrust statute as evidenced by the federal direct purchaser action
in which the defendants settled, knowing they had no pass-through defense.
{16}
This Court believes that there may be a distinction between those cases
in which the plaintiff class consists solely of indirect purchasers who were
the ultimate consumers and those cases in which the plaintiff class consists
of various purchasers in a distribution chain.
A case in which a plaintiff class of purchasers consists of only
ultimate consumers and the cost increase in a consumer product is clearly
passed through to the ultimate consumer may not pose complex apportionment
issues. Therefore, the facts in Hyde
are distinguishable from the facts in the present case.
{17}
However, this Court finds no language in Hyde
which would indicate that the Court of Appeals intended to carve out a narrow
exception for indirect purchasers who where ultimate consumers.
Instead, this Court reads Hyde
to grant indirect purchasers standing, thus creating a private cause of action
for all purchasers in the distribution chain.
This Court does not have the authority to grant defendant’s motion to
dismiss if doing so would be in direct conflict with governing case law.
This Court may not base its decision upon a determination that the Hyde
case was wrongly decided. Accordingly,
defendant’s motion to dismiss is denied.
III.
{18} The existence of indirect purchaser standing spawns additional significant issues which have never been addressed by the appellate courts or the General Assembly. Those issues are not before the Court on this motion. However, the Court notes several questions that will need to be resolved in indirect purchaser cases.
{19}
For example, are defendants in indirect purchaser cases permitted to
establish that any increased costs were not passed through to plaintiff?
In this case, distributors have already recovered in settlement,
presumably because they did not pass on the alleged increase in price
resulting from the alleged price fixing.
Is that recovery admissible in evidence?
The rationale of Hanover Shoe
and Illinois Brick would dictate
that if plaintiffs are required to prove the pass-on, defendants may offer
evidence of no pass-through in rebuttal.
{20} Similarly, who bears the burden of proof on the pass-through issue? Must a plaintiff prove the pass-through to them or their class or subclass? Must defendants then prove that the specific plaintiff passed the increased costs on to someone further down in the chain or must the plaintiff show that the plaintiff absorbed the cost?
{21} If the question of allocation of the alleged increase along the chain of distribution creates conflicts among potential plaintiffs, is the Court required to create subclasses to deal with the potential conflicts? Do the issues become so individualized or the individual damages so fragmented and small that class action treatment is inappropriate?
{22} What proof will proposed class members have to establish with respect to the origin of the film they consumed or paid for? The alleged co-conspirators have settled.[fn4] Must each class member show that he paid too much for Kodak film and how much or may purchasers of Fuji film recover from Kodak because of the alleged conspiracy?
{23} All of these thorny issues are eliminated by the federal approach but cannot be avoided if indirect purchaser standing exists. These issues, along with the central issue of indirect purchaser standing, significantly affect the public interest and involve legal principles of major significance to the jurisprudence of the state which have not been addressed by the North Carolina Supreme Court.
{24}
The decision of the Court of Appeals in the Hyde
case is controlling authority in this state on the question of indirect
purchaser standing under N.C.G.S. § 75-16.
It is difficult to interpret the language of the 1969 amendment to the
statute as doing anything other than establishing indirect purchaser standing.
However, this case raises the specific issues of concern to the United
States Supreme Court in Illinois Brick.
The General Assembly, in amending the statute, did not provide any
statutory guidance on how to deal with apportionment and pass-through issues
or multiple liability questions. There
is no guidance in the appellate decisions because those issues were not before
the court in Hyde.
The courts must address those issues if indirect purchaser standing
exists in North Carolina.
{25}
Wherefore, it is hereby Ordered
that Defendant Eastman Kodak Company’s Motion to Dismiss is denied.
This the 17th day
of March, 2000.
__________________________________________________________________________________________________________________________
Footnote
1 A settlement has been reached
between the plaintiff and defendants E.I. Dupont De Nemours & Co., Bayer
Corporation and FUJI Medical Systems U.S.A., Inc. thus rendering the motions
to dismiss filed by these defendants moot.
Footnote
2 Since the Hyde
decision, this Court has handled at least one other case involving settlement
of both direct and indirect purchaser claims.
See Long v. Abbott Labs,
1999 NCBC 10 (No. 97-CVS-8289, Mecklenburg County Super. Ct. July 30, 1999)
(Tennille, J).
Footnote
3 One of the problems inherent in
indirect purchaser class actions is that if the division of a settlement or
judgment is diverse, the distribution amount can be too small to warrant
individual claims against the fund, or can be so small that attorney fees and
administration costs become disproportionately high.
See Long v. Abbott Labs,
1999 NCBC 10 (No. 97-CVS-8289, Mecklenburg County Super. Ct. July 30, 1999)
(Tennille, J.) (order on petition for attorney fees).
The federal approach consolidates damages at the distributor level
where significant incentives to sue may exist and damages are far less
speculative and simpler to prove.
Footnote
4 Counsel for plaintiffs and the
other defendants have indicated to the Court that they have reached a
settlement. A final settlement,
including specification of how the settlement funds will be allocated, has not
been presented to the Court for approval.
Settlement will raise many of the same allocation issues.