January 31, 2018

Bringing Back Indirect Purchasers – DOJ Considers Seeking Reversal of Illinois Brick

For over 40 years, the Supreme Court has barred, with very limited exceptions, indirect purchasers— end customers who purchase products through an intermediate source—from seeking federal antitrust damages. But Andrew Finch, Principal Deputy Assistant Attorney General, stated on January 23, 2018, that the DOJ Antitrust Division is “looking at whether or not it might be worthwhile” to recommend that the Supreme Court reverse its decision—known as the Illinois Brick case—to bring “stability and continuity” to antitrust enforcement. Makan Delrahim, President Trump’s recently appointed DOJ Antitrust Division chief, has advocated reversal of Illinois Brick for over a decade.

Any reversal of Illinois Brick is years away—if it happens at all. If it does, antitrust class action litigation would change considerably.

The Illinois Brick Doctrine

Indirect purchasers do not buy goods directly from the manufacturer. In a typical price-fixing conspiracy (a per se violation of the Sherman Act), manufacturers collude to artificially raise the price of a product above the market price. Direct purchasers—anyone who buys product directly from the manufacturer—end up immediately paying that higher price, but often “pass on” that overcharge to indirect purchasers down the supply chain.

In Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), the Supreme Court held indirect purchasers do not have standing, with a few exceptions, under the federal antitrust laws to seek recovery from manufacturers for the overcharge the direct purchaser may have passed on. The Court’s holding built upon a prior decision, Hanover Shoe v. United Shoe Machine Corp., 392 U.S. 481 (1968), which held direct purchasers could recover the full value of a defendant’s overcharge, even if the direct purchaser had passed on that overcharge to indirect purchasers. 

The Supreme Court’s rationale for Illinois Brick and Hanover Shoe was threefold: (1) defendants could face duplicative damage awards by having to pay both the direct and indirect purchasers; (2) calculating indirect-purchaser damages is very complicated; and (3) direct purchasers are better positioned to sue antitrust violators, and giving them exclusive rights to damages encourages efficient enforcement of the antitrust laws.

Many have disagreed with the Illinois Brick doctrine. Almost 30 states—familiarly known as “Illinois Brick repealers”—have enacted statutes or issued case law allowing indirect purchasers to recover antitrust damages alongside direct purchasers. The result is a patchwork antitrust landscape in which antitrust defendants may face protracted litigation in multiple forums and the potential for duplicative damage awards. For example, antitrust defendants may have to pay the same damages twice: first to direct purchasers in federal court, and then to indirect purchasers in state court. Ironically, this is exactly what the Supreme Court hoped to avoid.

“Looking At” Reversing Illinois Brick

Andrew Finch, while speaking on January 23, 2018, on a panel at the Heritage Foundation’s conference, “Trump Antitrust Policy after One Year,” confirmed that the DOJ Antitrust Division is “looking at whether or not it might be worthwhile” for the Supreme Court to reverse Illinois Brick. “The ultimate decision in that regard is the Solicitor General’s,” Finch said. He said the Division wants to eliminate the “confusion” created by the “federal/state parallel system” for addressing indirect purchaser damages. “As I said at my Georgetown speech this summer, stability and continuity are important in antitrust enforcement and by and large I think that that is what you are seeing out of the Antitrust Division right now.”

Finch’s comments aren’t as unexpected as they might seem. Finch noted that the 2007 Report and Recommendations of the Antitrust Modernization Commission proposed reversing Illinois Brick. The Commission recommended instead that “[d]amages should be apportioned among all purchaser plaintiffs—both direct and indirect—in full satisfaction of their claims in accordance with the evidence as to the extent of the actual damages they suffered.” And “[d]amages in such actions [should] not exceed the overcharges (trebled) incurred by direct purchasers.”

Makan Delrahim participated in the Commission and supported this proposal. He, along with others on the Commission, argued that Illinois Brick (1) created “unjustifiable windfall[s]” for direct purchasers, (2) imposed “administrative burden[s] on both state and federal courts” from Illinois Brick repealer states; and (3) was based on the mistaken belief that federal courts should not attempt to resolve the “complexities of tracing overcharges through the chain of distribution.” Other scholars have expressed similar views.1

Implications

The implications of an Illinois Brick reversal remain unclear, but a reversal would dramatically change how direct and indirect purchaser plaintiffs approach antitrust class action litigation. On the one hand, reversal could open the floodgates to federal antitrust litigation by indirect purchasers. On the other hand, if the Supreme Court agrees with the 2007 Commission’s recommendation that “damages in such actions could not exceed the overcharges (trebled) incurred by direct purchasers” then direct purchaser plaintiffs would see their federal antitrust damages diminish, potentially discouraging them from bringing antitrust claims in the first place. Also, questions would remain about the ongoing potential for state-law recoveries. Many Illiniois Brick repealer states now have a robust canon of case law addressing recovery for indirect purchasers. Reversing Illinois Brick may not significantly limit the potential for duplicative recoveries in state court.

Regardless of the DOJ’s interest in indirect purchaser damages—whether under Illinois Brick or otherwise—preventing antitrust violations is the best way to avoid paying damages in the first place. Companies or individuals who have questions or concerns about what constitutes a violation of state and federal antitrust laws and how those violations could impact potential plaintiffs at all levels of the supply chain should consult with legal counsel.

1See Areeda & Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application, ¶346.

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