Illinois Brick Co. v. IllinoisAnnotate this Case
431 U.S. 720 (1977)
U.S. Supreme Court
Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977)
Illinois Brick Co. v. Illinois
Argued March 23, 1977
Decided June 9, 1977
431 U.S. 720
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
Respondents, the State of Illinois and 700 local governmental entities, brought this antitrust treble damages action under § 4 of the Clayton Act alleging that petitioners, concrete block manufacturers (which sell to masonry contractors, which in turn sell to general contractors, from which respondents purchase the block in the form of masonry structures) had engaged in a price-fixing conspiracy in violation of § 1 of the Sherman Act. Petitioners, relying on Hanover Shoe, Inc. v. United Shoe Machinery Corp.,392 U. S. 481, moved for partial summary judgment against all plaintiffs that were indirect purchasers of block from petitioners, contending that only direct purchasers could sue for the alleged overcharge. The District Court granted the motion, but the Court of Appeals reversed, holding that indirect purchasers such as respondents could recover treble damages for an illegal overcharge if they could prove that the overcharge was passed on to them through the intermediate distribution channels. Hanover Shoe held that generally the illegally overcharged direct purchaser suing for treble damages, and not others in the chain of manufacture or distribution, is the party "injured in his business or property" within the meaning of § 4.
1. If a pass-on theory may not be used defensively by an antitrust violator (defendant) against a direct purchaser (plaintiff), that theory may not be used offensively by an indirect purchaser (plaintiff) against an alleged violator (defendant). Therefore, unless Hanover Shoe is to be overruled or limited, it bars respondents' pass-on theory. Pp. 431 U. S. 729-736.
(a) Allowing offensive but not defensive use of pass-on would create a serious risk of multiple liability for defendants, since even though an indirect purchaser had already recovered for all or part of an overcharge passed on to him, the direct purchaser would still automatically recover the full amount of the overcharge that the indirect purchaser had shown to be passed on, and, similarly, following an automatic recovery of the full overcharge by the direct purchaser, the indirect purchaser could sue to recover the same amount. Overlapping recoveries would certainly result from the two lawsuits unless the indirect purchaser is unable to establish any pass-on whatsoever. Pp. 431 U. S. 730-731.
(b) The Court's perception in Hanover Shoe of the uncertainties and difficulties in analyzing price and output decisions "in the real economic world, rather than an economist's hypothetical model," applies with equal force to the assertion of pass-on theories by plaintiffs as it does to such assertion by defendants. Pp. 431 U. S. 731-733.
(c) Because Hanover Shoe would bar petitioners from using respondents' pass-on theory as a defense to a treble damages suit by the direct purchasers (the masonry contractors), Hanover Shoe must be overruled (or narrowly limited), or it must be applied to bar respondents' attempt to use this pass-on theory offensively. Pp. 431 U. S. 735-736.
2. Hanover Shoe was correctly decided, and its construction of § 4 is adhered to. Pp. 431 U. S. 736-747.
(a) Considerations of stare decisis weigh heavily in the area of statutory construction, where Congress is free to change this Court's interpretation of its legislation. Pp. 431 U. S. 736-737.
(b) Whole new dimensions of complexity would be added to treble damages suits, undermining their effectiveness, if the use of pass-on theories under § 4 were allowed. Even under the optimistic assumption that joinder of potential plaintiffs would deal satisfactorily with problems of multiple litigation and liability, § 4 actions would be transformed into massive multiparty litigations involving many distribution levels and including large classes of ultimate consumers remote from the defendant. The Court's concern in Hanover Shoe with the problems of "massive evidence and complicated theories" involved in attempting to establish a pass-on defense against a direct purchaser applies a fortiori to the attempt to trace the effect of the overcharge through each step in the distribution chain from the direct purchasers to the ultimate consumer. Pp. 431 U. S. 737-744.
(c) Attempts to carve out exceptions to Hanover Shoe for particular types of markets would entail the very problems that Hanover Shoe sought to avoid. Pp. 431 U. S. 744-745.
(d) The legislative purpose in creating a group of "private attorneys general" to enforce the antitrust laws under § 4, Hawaii v. Standard Oil Co. of California,405 U. S. 251, 405 U. S. 262, is better served by holding direct purchasers to be injured to the full extent of the overcharge paid by them than by attempting to apportion the overcharge among all that may have absorbed a part of it. Pp. 431 U. S. 745-747.
536 F.2d 1163, reversed and remanded.
WHITE, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, POWELL, REHNQUIST, and STEVENS, JJ., joined. BRENNAN, J., filed a dissenting opinion, in which MARSHALL and BLACKMUN, JJ.,
MR JUSTICE WHITE delivered the opinion of the Court.
Hanover Shoe, Inc. v. United Shoe Machinery Corp.,392 U. S. 481 (1968), involved an antitrust treble damages action
brought under § 4 of the Clayton Act [Footnote 1] against a manufacturer of shoe machinery by one of its customers, a manufacturer of shoes. In defense, the shoe machinery manufacturer sought to show that the plaintiff had not been injured in its business as required by § 4 because it had passed on the claimed illegal overcharge to those who bought shoes from it. Under the defendant's theory, the illegal overcharge was absorbed by the plaintiff's customers -- indirect purchasers of the defendant's shoe machinery -- who were the persons actually injured by the antitrust violation.
In Hanover Shoe, this Court rejected as a matter of law this defense that indirect, rather than direct, purchasers were the parties injured by the antitrust violation. The Court held that, except in certain limited circumstances, [Footnote 2] a direct purchaser suing for treble damages under § 4 of the Clayton Act is injured within the meaning of § 4 by the full amount of the overcharge paid by it, and that the antitrust defendant is
not permitted to introduce evidence that indirect purchasers were in fact injured by the illegal overcharge. 392 U.S. at 392 U. S. 494. The first reason for the Court's rejection of this offer of proof was an unwillingness to complicate treble damages actions with attempts to trace the effects of the overcharge on the purchaser's prices, sales, costs, and profits, and of showing that these variables would have behaved differently without the overcharge. Id. at 392 U. S. 492-493. [Footnote 3] A second reason for barring the pass-on defense was the Court's concern that unless direct purchasers were allowed to sue for the portion of the overcharge arguably passed on to indirect purchasers, antitrust violators "would retain the fruits of their illegality"
because indirect purchasers "would have only a tiny stake in the lawsuit," and hence little incentive to sue. Id. at 431 U. S. 494.
In this case, we once again confront the question whether the overcharged direct purchaser should be deemed for purposes of § 4 to have suffered the full injury from the overcharge; but the issue is presented in the context of a suit in which the plaintiff, an indirect purchaser, seeks to show its injury by establishing pass-on by the direct purchaser and in which the antitrust defendants rely on Hanover Shoe's rejection of the pass-on theory. Having decided that, in general, a pass-on theory may not be used defensively by an antitrust violator against a direct purchaser plaintiff, we must now decide whether that theory may be used offensively by an indirect purchaser plaintiff against an alleged violator.
Petitioners manufacture and distribute concrete block in the Greater Chicago area. They sell the block primarily to masonry contractors, who submit bids to general contractors for the masonry portions of construction projects. The general contractors, in turn, submit bids for these projects to customers such as the respondents in this case, the State of Illinois and 700 local governmental entities in the Greater Chicago area, including counties, municipalities, housing authorities, and school districts. See 67 F.R.D. 461, 463 (ND Ill.1975); App. 16-48. Respondents are thus indirect purchasers of concrete block, which passes through two separate levels in the chain of distribution before reaching respondents. The block is purchased directly from petitioners by masonry contractors and used by them to build masonry structures; those structures are incorporated into entire buildings by general contractors and sold to respondents'
Respondent State of Illinois, on behalf of itself and respondent local governmental entities, brought this antitrust treble damages action under § 4 of the Clayton Act, alleging that
petitioners had engaged in a combination and conspiracy to fix the prices of concrete block in violation of § 1 of the Sherman Act. [Footnote 4] The complaint alleged that the amounts paid by respondents for concrete block were more than $3 million higher by reason of this price-fixing conspiracy. The only way in which the antitrust violation alleged could have injured respondents is if all or part of the overcharge was passed on by the masonry and general contractors to respondents, rather than being absorbed at the first two levels of distribution. See Illinois v. Ampress Brick Co., 536 F.2d 1163, 1164 (CA7 1976). [Footnote 5]
Petitioner manufacturers moved for partial summary judgment against all plaintiffs that were indirect purchasers of concrete block from petitioners, contending that, as a matter of law, only direct purchasers could sue for the alleged overcharge. [Footnote 6] The District Court granted petitioners' motion, but the Court of Appeals reversed, holding that indirect purchasers such as respondents in this case can recover treble damages for an illegal overcharge if they can prove that the overcharge
was passed on to them through intervening links in the distribution chain. [Footnote 7]
We granted certiorari, 429 U.S. 938 (1976), to resolve a conflict among the Courts of Appeals [Footnote 8] on the question whether the offensive use of pass-on authorized by the decision below is consistent with Hanover Shoe's restrictions on the defensive use of pass-on. We hold that it is not, and we reverse. We reach this result in two steps. First, we conclude that, whatever rule is to be adopted regarding pass-on in antitrust damages actions, it must apply equally to plaintiffs and defendants. Because Hanover Shoe would bar petitioners from using respondents' pass-on theory as a defense to a treble damages suit
by the direct purchasers (the masonry contractors), [Footnote 9] we are faced with the choice of overruling (or narrowly limiting) Hanover Shoe or of applying it to bar respondents' attempt to use this pass-on theory offensively. Second, we decline to abandon the construction given § 4 in Hanover Shoe -- that the overcharged direct purchaser, and not others in the chain of manufacture or distribution, is the party "injured in his business or property" within the meaning of the section -- in the absence of a convincing demonstration that the Court was wrong in Hanover Shoe to think that the effectiveness of the antitrust treble damages action would be substantially reduced by adopting a rule that any party in the chain may sue to recover the fraction of the overcharge allegedly absorbed by it.
The parties in this case agree that however § 4 is construed with respect to the pass-on issue, the rule should apply equally to plaintiffs and defendants -- that an indirect purchaser should not be allowed to use a pass-on theory to recover damages from a defendant unless the defendant would be allowed to use a pass-on defense in a suit by a direct purchaser. Respondents, in arguing that they should be allowed to recover by showing pass-on in this case, have conceded that petitioners should be allowed to assert a pass-on defense against direct purchasers of concrete block, Tr. of Oral Arg. 33, 48; they ask this Court to limit Hanover Shoe's bar on pass-on defenses to its "particular factual context" of overcharges for capital goods used to manufacture new products. Id. at 41; see id. at 36, 47-48.
Before turning to this request to limit Hanover Shoe, we consider the substantially contrary position, adopted by our dissenting Brethren, by the United States as amicus curiae, and by lower courts that have allowed offensive use of pass on, that the unavailability of a pass-on theory to a defendant
should not necessarily preclude its use by plaintiffs seeking treble damages against that defendant. [Footnote 10] Under this view, Hanover Shoe's rejection of pass-on would continue to apply to defendants unless direct and indirect purchasers were both suing the defendant in the same action; but it would not bar indirect purchasers from attempting to show that the overcharge had been passed on to them. We reject this position for two reasons.
First, allowing offensive but not defensive use of pass-on would create a serious risk of multiple liability for defendants. Even though an indirect purchaser had already recovered for all or part of an overcharge passed on to it, the direct purchaser would still recover automatically the full amount of the overcharge that the indirect purchaser had shown to be passed on; similarly, following an automatic recovery of the full overcharge by the direct purchaser, the indirect purchaser could sue to recover the same amount. The risk of duplicative recoveries created by unequal application of the Hanover Shoe rule is much more substantial than in the more usual situation where the defendant is sued in two different lawsuits by plaintiffs asserting conflicting claims to the same fund. A one-sided application of Hanover Shoe substantially increases the possibility of inconsistent adjudications -- and therefore of unwarranted multiple liability for the defendant -- by presuming that one plaintiff (the direct purchaser) is entitled to full recovery while preventing the defendant from using that presumption against the other plaintiff; overlapping recoveries are certain to result from the two lawsuits
unless the indirect purchaser is unable to establish any pass-on whatsoever. As in Hawaii v. Standard Oil Co. of Cal.,405 U. S. 251, 405 U. S. 264 (1972), we are unwilling to "open the door to duplicative recoveries" under § 4. [Footnote 11]
Second, the reasoning of Hanover Shoe cannot justify unequal treatment of plaintiffs and defendants with respect to the permissibility of pass-on arguments. The principal basis for the decision in Hanover Shoe was the Court's perception of the uncertainties and difficulties in analyzing price and output
decisions "in the real economic world, rather than an economist's hypothetical model," 392 U.S. at 392 U. S. 493, and of the costs to the judicial system and the efficient enforcement of the antitrust laws of attempting to reconstruct those decisions in the courtroom. [Footnote 12] This perception that the attempt to trace the complex economic adjustments to a change in the cost of a particular factor of production would greatly complicate and reduce the effectiveness of already protracted treble damages proceedings applies with no less force to the assertion of pass-on theories by plaintiffs than it does to the assertion by defendants. However "long and complicated" the proceedings would be when defendants sought to prove pass-on, ibid., they would be equally so when the same evidence was introduced by plaintiffs. Indeed, the evidentiary complexities and uncertainties involved in the defensive use of pass-on against a direct purchaser are multiplied in the offensive use of pass-on by a plaintiff several steps removed from the defendant in the chain of distribution. The demonstration of how much of the overcharge was passed on by the first purchaser must be repeated at each point at which
the price-fixed goods changed hands before they reached the plaintiff. [Footnote 13]
It is argued, however, that Hanover Shoe rests on a policy of ensuring that a treble damages plaintiff is available to deprive antitrust violators of "the fruits of their illegality," id. at 392 U. S. 494, a policy that would be furthered by allowing plaintiffs, but not defendants, to use pass-on theories. See, e.g., In re Western Liquid Asphalt Cases, 487 F.2d 191, 197 (CA9 1973), cert. denied sub nom. Standard Oil Co. of Cal. v. Alaska, 415 U.S. 919 (1974); Brief for United States as Amicus Curiae 6, 113, 17-19. [Footnote 14] We do not read the Court's
concern in Hanover Shoe for the effectiveness of the treble damages remedy as countenancing unequal application of the Court's pass-on rule. Rather, we understand Hanover Shoe
as resting on the judgment that the antitrust laws will be more effectively enforced by concentrating the full recovery for the overcharge in the direct purchasers, rather than by allowing every plaintiff potentially affected by the overcharge to sue only for the amount it could show was absorbed by it.
We thus decline to construe § 4 to permit offensive use of a pass-on theory against an alleged violator that could not use the same theory as a defense in an action by direct purchasers. In this case, respondents seek to demonstrate that masonry contractors, who incorporated petitioners' block into walls and other masonry structures, passed on the alleged overcharge on the block to general contractors, who incorporated the masonry structures into entire buildings, and that the general contractors, in turn, passed on the overcharge to respondents in the bids submitted for those buildings. We think it clear that, under a fair reading of Hanover Shoe, petitioners would be barred from asserting this theory in a suit by the masonry contractors.
In Hanover Shoe, this Court did not endorse the broad exception that had been recognized in that case by the courts below -- permitting the pass-on defense against middlemen who did not alter the goods they purchased before reselling them. [Footnote 15] The masonry contractors here could not be included under this exception in any event, because they transform the concrete block purchased from defendants into the masonry portions of buildings. But this Court, in Hanover Shoe,
indicated the narrow scope it intended for any exception to its rule barring pass-on defenses by citing, as the only example of a situation where the defense might be permitted, a preexisting cost-plus contract. In such a situation, the purchaser is insulated from any decrease in its sales as a result of attempting to pass on the overcharge, because its customer is committed to buying a fixed quantity regardless of price. The effect of the overcharge is essentially determined in advance, without reference to the interaction of supply and demand that complicates the determination in the general case. The competitive bidding process by which the concrete block involved in this case was incorporated into masonry structures and then into entire buildings can hardly be said to circumvent complex market interactions as would a cost-plus contract. [Footnote 16]
We are left, then, with two alternatives: either we must overrule Hanover Shoe (or at least narrowly confine it to its facts), or we must preclude respondents from seeking to recover on their pass-on theory. We choose the latter course.
In considering whether to cut back or abandon the Hanover Shoe rule, we must bear in mind that considerations of stare decisis weigh heavily in the area of statutory construction, where Congress is free to change this Court's interpretation of its legislation. See Edelman v. Jordan,415 U. S. 651, 415 U. S. 671 (1974); Burnet v. Coronado Oil & Gas Co.,285 U. S. 393, 285 U. S. 406-408 (1932) (Brandeis, J., dissenting). This presumption of adherence to our prior decisions construing legislative enactments would support our reaffirmance of the Hanover Shoe
construction of § 4, joined by eight Justices without dissent only a few years ago, [Footnote 17] even if the Court were persuaded that the use of pass-on theories by plaintiffs and defendants in treble damages actions is more consistent with the policies underlying the treble damages action than is the Hanover Shoe rule. But we are not so persuaded.
Permitting the use of pass-on theories under § 4 essentially would transform treble damages actions into massive efforts to apportion the recovery among all potential plaintiffs that could have absorbed part of the overcharge -- from direct purchasers to middlemen to ultimate consumers. However appealing this attempt to allocate the overcharge might seem in theory, it would add whole new dimensions of complexity to treble damages suits, and seriously undermine their effectiveness.
As we have indicated, potential plaintiffs at each level in the distribution chain are in a position to assert conflicting claims to a common fund -- the amount of the alleged overcharge -- by contending that the entire overcharge was absorbed at that particular level in the chain. [Footnote 18] A treble damages action brought by one of these potential plaintiffs (or one class of potential plaintiffs) to recover the overcharge implicates all three of the interests that have traditionally been thought to support compulsory joinder of absent and potentially adverse claimants: the interest of the defendant in
avoiding multiple liability for the fund; the interest of the absent potential plaintiffs in protecting their right to recover for the portion of the fund allocable to them; and the social interest in the efficient administration of justice and the avoidance of multiple litigation. Reed, Compulsory Joinder of Parties in Civil Actions, 55 Mich.L.Rev. 327, 330 (1957). See Provident Tradesmens Bank & Trust Co. v. Patterson,390 U. S. 102, 390 U. S. 110-111 (1968); 7 C. Wright & A. Miller, Federal Practice and Procedure § 1602 (1972).
Opponents of the Hanover Shoe rule have recognized this need for compulsory joinder in suggesting that the defendant could interplead potential claimants under 28 U.S.C. § 1335. [Footnote 19] But if the defendant, for any of a variety of reasons, [Footnote 20] does not choose to interplead the absent potential claimants, there would be a strong argument for joining them as "persons needed for just adjudication" under Fed.Rule Civ.Proc.19(a). [Footnote 21] See Comment, Standing to Sue in Antitrust Cases:
The Offensive Use of Passing-On, 123 U.Pa.L.Rev. 976, 998 (1975). These absent potential claimants would seem to fit the classic definition of "necessary parties," for purposes of compulsory joinder, given in Shield v. Barrow, 17 How. 130, 58 U. S. 139 (1855):
"Persons having an interest in the controversy, and who ought to be made parties, in order that the court may act on that rule which requires it to decide on, and finally determine the entire controversy, and do complete justice, by adjusting all the rights involved in it."
See Notes of Advisory Committee on 1966 Amendment to Rule 19, 8 U.S.C.App. p. 7760; 7 C. Wright & A. Miller, supra, §§ 1604, 1618; 3A J. Moore, Federal Practice 19.08 (1974). The plaintiff bringing the treble damages action would be required, under Fed.Rule Civ.Proc.19(c), to "state the names, if known," of these absent potential claimants; they should also be notified by some means that the action was pending. [Footnote 22] Where, as would often be the case, the potential claimants at a particular level of distribution are so numerous that joinder of all is impracticable, a representative presumably would have to be found to bring them into the action as a class. See Fed.Rule Civ.Proc.19(d); 3A J. Moore, supra,
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