The U.S. Court of Appeals in San Francisco has taken away from the states one of their most potent weapons in fighting price-fixing. But the loss may help them more than a victory would have.
That's because the May 27 ruling, which told states they could not change the rules on who can bring an antitrust suit, may serve as a goad to Congress to enact an amendment that will apply nationwide.
The controversy stems from the dual enforcement approach of the antitrust laws. The government can bring charges against companies that get together to divide up a market or that adopt marketing schemes that inhibit competition. But those hurt by the assaults on competition also can sue. To encourage such private suits, plaintiffs collect not just the amount of their injuries, but three times their losses.
There has long been debate, however, about who can sue. If three hairdressers in a small town get together after work and decide that next Monday they will all raise their prices $2 for a shampoo and set, it is a pretty easy matter to identify who has to pay how much more because of the conspiracy. But goods usually pass through many hands between manufacturer and the ultimate consumer. If the makers of shampoo decide to fix prices, who's hurt? The wholesalers? The salons? The customers?
Back in 1968, in a case that was the equivalent of wholesalers suing shampoo manufacturers, the manufacturer said the distributors suffered no loss from a plan to jack up prices, because they passed on the higher prices to their customers.
The Supreme Court rejected the argument, saying that trying to trace the amount of overcharging through the entire chain of distribution "would often require additional long and complicated proceedings involving massive evidence and complicated theories." In 1977, the justices dropped the other shoe. If manufacturers had to deal with claims from their direct customers even if overcharges had been passed on, the high court majority reasoned, then it would not be fair to let indirect customers sue as well.
In other words, customers of the beauty parlors couldn't sue the shampoo makers. The fact is that few customers would have bothered; the few cents involved, even when trebled, would hardly be worth the aggravation. But really big purchasers of some products or services might have had their costs so inflated that significant amounts of money were at stake.
State and local governments are just such purchasers. They argue, for instance, that they have to pay contractors more than they should for building new roads because suppliers of cement keep their prices artificially high.
State attorneys general looked on the 1977 ruling against antitrust suits by indirect purchasers as a big setback, and have been lobbying Congress ever since to change the law. But many adopted an alternative strategy: They asked their state legislatures to amend antitrust laws to allow indirect purchasers to sue price-fixers.
More than a dozen states have added such provisions in recent years. But those state laws were invalidated last month in the decision in the cement and concrete antitrust litigation, a massive compilation of 35 separate suits from 12 federal trial courts, claiming that there was a nationwide conspiracy to fix the price of cement.
In Phoenix, District Judge Manual L. Real threw out the state statutes as "clear attempts to frustrate the purposes and objectives of Congress, as interpreted by the Supreme Court" in the 1977 ruling.
The appellate judges in San Francisco agreed. Judge J. Clifford Wallace explained that if indirect purchasers could sue for damages, it would upset the whole federal antitrust structure as outlined in the 1977 ruling. Such suits not only would be complicated and undercut the incentive of direct purchasers -- the most likely to be able to prove a conspiracy -- to sue, but "they create the risk of multiple liability for defendants," he wrote. The Supreme Court has said that's a no-no.
The litigation isn't over. The states are almost sure to ask the Supreme Court to review the San Francisco ruling, and some analysts believe state laws might be upheld by a coalition of justices on the right who believe in the authority of the individual states to set their own legal policies and justices on the left who believe in strong antitrust. But the appellate ruling also adds zest to the campaign to get Congress to rewrite the Sherman Act to allow suits by indirect purchasers. "What it does is create another meritorious argument for the bill," said lawyer Ray Marvin, until recently head of the National Association of Attorneys General. Sen. Howard M. Metzenbaum (D-Ohio), chairman of the Senate antitrust subcommittee, is planning to introduce his own version of an indirect purchaser measure in early fall. The Justice Department has hinted that it might back the bill, as long as it it written so that it funnels money to those actually injured rather than to the lawyers who wage the cases.
Moskowitz covers legal affairs for McGraw-Hill World News.